Law of Financial Services.

The second function of the CCA is to place controls on the advertising and canvassing of credit.  Some of these rules are Section 45 which states it is an offence to advertise goods or services on credit where they are not available for cash, Section 50 which states it is an offence to send an under 18 document inviting them seek information on credit or obtain credit, and Section 52 which is about content and form of a quotation and that it must include prominent reference to the Annual Percentage Rate (APR).  Any breach of these rules is a criminal offence and will leave the creditor liable to prosecution.  However Section 170 states that any offence against advertising provisions does not in itself affect the validity or enforceability of an agreement.       

The third function of the CCA is to regulate individual credit agreements and to provide the debtor with certain rights, irrespective of express agreement between the debtor and the creditor.  This particular area is where the greatest legal relationship between the debtor and the creditor occurs; it also gives the debtor the greatest amount of protection.  The CCA defines a consumer credit agreement in Section 8.  It states a regulated agreement is a personal credit agreement between the debtor and the creditor by which the creditor provides the debtor with credit of any amount.  In the agreement the amount of credit does not exceed £25,000 (this amount does not include interest).  It is not possible to increase the limit above £25000 to take the agreement out of the CCA.  The agreement will still be regulated by the CCA if the amount is never likely to exceed £25,000.  The CCA also covers the agreement if there are temporary excesses above £25,000, if no limit is set and the balance does not exceed £25,000 and if it does and it becomes more expensive to borrow.  These areas are set out in more detail in Section’s 10,11,12 and 13.

The CCA categorises the types of credit agreement into three types.  The first type is running-account credit and fixed sum credit and are defined in Section 10.  Running account is a facility under an agreement whereby the debtor can from time to time receive credit from the creditor.  The debtor can then pay off all, or part of that amount.  Therefore the balance can be increasing and decreasing over time but still below the credit limit.  Examples of running credit are a current account overdraft and the credit card account.  The definition of the credit card as a ‘credit token’ is in Section 14.  

Fixed sum credit is defined as any other form of credit from running credit such as a loan.  This type of credit is paid off in instalments and the balance will decrease over time.  

The second type of credit agreement is restricted and unrestricted-use of credit.  The CCA defines this in Section 11.  Restricted-use credit is where the creditor retains control over how the debtor uses the funds.  An example of this is a mortgage where the creditor retains control by advancing the funds to a solicitor, so they can issue them solely for the purpose of purchasing a particular property.  The agreement does not have to stipulate what the funds are for, but it is defined as restricted-use credit solely if the creditor keeps control of the credit.  Therefore unrestricted-use credit the debtor can use the funds in anyway they choose.   

The third type of agreement is the debtor-creditor-supplier (Section 12) and debtor-creditor (Section 13).

In Section 12 the debtor-creditor-supplier agreement comes in two forms.  The first is where the creditor actually supplies the goods or services to the debtor.  For example this could be an electrical retailer who also offers their own finance.  The other is where the creditor has a pre-existing arrangement with the supplier of the goods and services in the knowledge that the credit is to be used to finance a transaction between the debtor and the supplier.  An example of this is a credit card company who have an agreement with a shop supplying goods and services to the debtor.  

The below case is an example of the use of Section 12 and 11.

Citibank International v Schleider (25th January 1999)

C gave the debtors a mortgage.  The mortgage was paid in monthly instalments.  There was a deed that altered the payments by means of a discount which was then removed from the balance.  The debtors fell into areas and C called in the debt.  The debtors said that the montage was nullified.

Held:  The Judge said that the deed did not constitute a debtor-creditor-supplier agreement under the CCA Section 12 since it was not a restricted-use agreement written in 11(1).  The terms of the deed left the debtor free to apply the discount as they pleased. 

This case was much more complicated than above with Acts other than the CCA being used.  This case though does demonstrate the application of restricted and unrestricted-use credit and how it can be applied.        

Section 13

Section 13 states that the debtor-creditor agreement can be either unrestricted-use or restricted-use.  These types of agreements can be bank overdrafts, personal loan and credit cards used to obtain cash.

There are a number of exempt agreements which are excluded from the regulations and these are in Section 16.

The CCA is very much in favour of the debtor and this can be seen through the numerous protections that it provides to the debtor.  A number of these debtor protections follow.  

Section 64 states the duty to give notice of cancellation rights.  This states that a debtor must be given a copy of the how and when the right to cancel a cancellable agreement is exercisable.  Or under (1)(b) it must be sent to the debtor within seven working days.  

In accordance with Section 67 a regulated agreement may be cancelled by the debtor if the negotiations preceding the agreement included oral representations made in the presence of the debtor by an individual acting as, or on behalf of the negotiator.  

Section 68 gives the debtor a cooling off period after the agreement has been made.  This means the debtor has five days in which to serve notice of cancellation on the unexecuted agreement.  Or under 64(1)(b) the end of the fourteenth day because it was issued by post.

Section 75 states the liability of the creditor for breaches by the supplier.  It provides protection to the debtor if the debtor has entered a debtor-creditor-supplier agreement.  The debtor can make a claim against the supplier of a good or service if they have purchased on credit and they believe there has been misrepresentation or breach of contract.  However the debtor can also make the same claim against the supplier of the credit. The creditor is indemnified against the supplier and can claim back the damages from the supplier plus any costs reasonably incurred in defending the legal proceedings from the debtor.   It is therefore important for the debtor to demonstrate the relationship between the parties.  Section 75 is used most when a company has gone into liquidation.

The case bellow is an example of the debtor-creditor-supplier relationship in respect of Section 75.

Citibank Trust v Allen (29th July 1991)

Two sisters S & N shared a house, one of the sisters contracted the second defendant for central heating.  S obtained a loan from the plaintiff to finance the heating.  S defaulted on the finance and was sued.  S claimed the heating was defective.  The case went to trial on the basis that S was both the borrower and the purchaser.  However the supplier sought to amend its defence to show that N had bought the heating and the CCA Section 75 did not therefore apply since S could not be said to have a claim against the supplier.

Held:  The judge refused the amendment as the case material had been available for a period of years.

Even though in this case there was no point in principle it still demonstrates the application of the debtor-creditor-supplier agreement in respect of joint & several liability of creditor debtor claim    

Another section that protects the debtor is Section 127.  This states that the court can dismiss an application for an enforcement order in the case of an infringement to the agreement.  These infringements can be improperly executed or failure to serve copy of notice to surety and taking of negotiable instrument in contravention of Section123.  The court may in an enforcement order reduce the sum payable by the debtor and compensate them for prejudice suffered as a result of the contravention.     

Section 129 also provides protection to the debtor.  Its states that the court can extend the time the debtor has to pay back the sum owed.  The extra time is what the court considers reasonable.

Sections 137 to 140 protect the debtor from extortionate credit bargains.  These can be when the debtor has to pay exorbitant repayments.  Prevailing interest rates at the time are taken into account.  The court can reopen an agreement and can have payments made by the debtor returned if they decide the agreement is extortionate.  Each case is dependant on its facts.  In the case of A. Ketley Ltd v Scott an interest rate of 48% was not found to be extortionate.  But in the case of Castle Phillips Co Ltd v Wilkinson an interest rate of 3.5% the building society rate was found to be extortionate.  A case that was not in favour of the debtor was that of Broadwick Financial Services Ltd v Spencer 21 December 2001 on appeal 30 January 2002.  Here the debtor tried to say that the interest rate was extortionate but the court did not and found in favour of the creditor.       

Before the introduction of the CCA the law was very much in the favour of the creditor.  With the introduction of the CCA the law is very much now on the side of the debtor.  As a result this may be deterring companies from setting up business in the UK.    

The case of McGinn v Grangewood Securities (23rd April 2002) demonstrates how the Judge and other Judges view the CCA.  Lord Justice Clarke of the Court of Appeal said, “Several cases expressly recognise that the CCA was designed for the protection of the consumer and therefore is should be construed with that consideration in mind”.  From this it can be seen that when the CCA is used it should be mainly for the protection of the consumer.  

The CCA is a very complex area of the law.  By nature being complex it is very difficult to understand by those wishing to set up business offering credit and users of credit, the debtor.   The CCA is also very difficult and complex for Judges who have to use the CCA in making judgments in cases brought before them by the debtor.  The case of McGinn v Grangewood Securities (23rd April 2002) again gives an idea of this complexity in the notes to the case by Lord Justice Clarke.  “These appeals raise a number of issues under the CCA which has recently provided so much work for the courts.  Like others, this case demonstrates the unsatisfactory state of the law at present.  Simplification of a part of the law which is intended to protect the consumer is surely long overdue so as to make it more comprehensible to layman and lawyer alike.  At present it is not comprehensible to the former and is scarcely comprehensible to the latter.”

The advice to the Bugatty-Droog’s is based on the above law and that is not to set up a consumer credit business in the UK.  This decision is solely based on the law, but they make their decision tacking into account other factors for example perspective profits. The decision is based as stated above on that the law is very complex and difficult to understand for the creditor, debtor and the Judges and legal system.  It is also based on the fact that the CCA is very much in favour of the debtor.  The result of this is that in most cases brought to court the creditor is unlikely to have their funds returned.

The Bugatty-Droog’s may wish to review the situation in the future if they decide to take the advice.  The reason for this is the CCA is undergoing wholesale review by the Department of Trade and Industry (DTI).  Work to make the necessary legislative changes started in early 2003.        

Bibliography:

R. M. Goode, Consumer Credit, A. W. Sijthoff-Leyden/Boston, 1st Edition, 1978.

Francis Bennion, Consumer Credit Act Manual, Oyez Publishing Ltd, 2nd Edition 1981.

Richard Card & Jennifer James, Law for Accountancy Students, Butterworth’s, 4th Edition, 1990.

David Kelly & Ann Holmes, Principle of Business Law, Cavendish Publishing Ltd, 2nd Edition, 1998.

F. D. Rose, Statues on Commercial & Consumer Law, Blackstone’s, 8th Edition, 1999.  

Goode, Consumer Credit Reports, Butterworth’s, Issue 8, 2002.

Graham Roberts, Law Relating to Financial Services, Institute of Financial Services, 5th Edition, 2003.

 

         

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