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Consumer Credit Act 2006

Most mortgage litigators will at some time or another have had to deal with the Consumer Credit Act 1974. The substantive provisions are complex and non-compliance with the procedural provisions can exact heavy penalties. See for example London North Securities Ltd v Meadows [2005] EWCA Civ 956.

The Consumer Credit Act 2006, which makes extensive amendments to the 1974 Act, received the Royal Assent on 30 March 2006. Some of its provisions came into force on 16th June 2006 and 1st October 2006. However the main provisions affecting mortgages are yet to be brought into force.

The purpose of this note is to summarise the general framework of the 1974 Act, so far as it relates to mortgages, and to identify the main amendments to be introduced under the 2006 Act.

Nigel Clayton
February 2007

Substantive provisions

The general scheme of the Act is to regulate consumer credit agreements other than exempt agreements.

Consumer credit agreements are personal credit agreements in which the creditor provides the debtor with credit not exceeding £25,000. (This sum has been progressively increased by various Increase of Monetary Limits Orders from £5,000 to £15,000 to its current limit of £25,000 in 1998).

Section 2 of the 2006 Act removes the financial limit so that all consumer credit agreements, apart from those specifically exempted, will be caught by the Act. However, further amendments give the Secretary of State the power to provide by order or regulations exemption of consumer credit agreements from regulation where the debtor has a high net worth (s 3) or where the consumer credit agreement is entered into wholly or predominantly for the debtor's business purposes where the credit provided exceeds £25,000 (s 4).

There are a number of important exemptions under s 16 of the 1974 Act including institutions authorised under the Building Societies Act 1986 and the Banking Act 1987 (Consumer Credit (Exempt) Agreements Order 1989 as amended by the Financial Services and Markets Act 2000). In practice this extends to most High Street Banks and Building Societies so that in consequence, the main thrust of the Act applies to consumer credit agreements entered into by finance houses.

The 1974 Act also extended to the provision of "land mortgages", defined in s 189(1) of the 1974 Act as including any security charged on land - with statutory provisions regulating the taking of security in Part VIII of the Act. Section 126 provided that where a regulated agreement secured a land mortgage, the mortgage was enforceable only on an order of the Court.

Procedural provisions

Part V of the 1974 Act contained extensive provisions to regulate entry into credit agreements.

Section 58 afforded an opportunity for withdrawal from a prospective land mortgage and subject to certain exceptions, required the creditor to give the debtor a copy of the unexecuted agreement containing a notice in the prescribed form indicating the right of the debtor to withdraw from the prospective agreement.

Section 60 made provision for the form and content of agreements; section 61 with the signing of agreements; section 62 with the duty to supply a copy of the unexecuted agreement; section 63 with the duty to supply a copy of the executed agreement; and section 64 with the duty to give notice of cancellation rights.

Significantly, section 65 dealt with the consequences of improper execution in accordance with these provisions and provided that an improperly-executed agreement was enforceable against the debtor on an order of the court only (and that the re-taking of any land to which a regulated agreement relates is an enforcement of the agreement).

Finally, section 68 and most of the remaining provisions of Part V made provision for a "cooling-off" period and the subsequent cancellation of the agreement.

All of these procedural provisions remain unaffected by the 2006 Act although in addition, the 2006 Act also makes further provision for the giving of information and the duty to provide statements, including the obligation to give notice of sums in arrears, which in turn affects the ability of the creditor to enforce the agreement - see below.

Enforcement

Part VII of the 1974 Act dealt with default and termination.

The pre-requisite to enforcement was the service of the default notice in the prescribed form under sections 87-88 of the 1974 Act, with the consequence that under section 89 if before the date specified in the default notice, the debtor demanded earlier payment of any sum or recovered possession of any land, the breach was treated as not having arisen.

Section 88(1) provided that the default notice must specify (a) the nature of the alleged breach; (b) if the breach is capable of remedy, what action is required to remedy it and the date before which that action is to be taken; and (c) if the breach is not capable of remedy, the sum (if any) required to be paid as compensation for the breach, and the date before which it is to be paid.

By section 88(2) the date specified must not be less than 7 days after the date of service of the default notice.

Section 14 of the 2006 Act now extends the period to 14 days with effect from 1 October 2006.

Sections 8-13 of the 2006 Act also make extensive additions to Part VII, by adding a new section 86A-E. The amendments take effect on a date to be appointed.

Section 86A provides that the Office of Fair Trading shall prepare and give general notice of an arrears information sheet and a default information sheet, subject to regulations which may make provision about the information to be included - the aim being to help debtors who receive default notices.

Sections 86B and C make detailed provision for the giving of notices of sums in arrears in respect of fixed sum credit agreements and running account credit agreements.

The consequences of failure to give notice of the sums in arrears is set out in section 86D. It stipulates a period of compliance and provides that the creditor shall not be entitled to enforce the agreement during the period of non-compliance and that the debtor shall have no liability to pay interest or any default sums which fall due during the period of non-compliance.

Section 86E deals with the requirement to give notice of any default sums payable under a regulated agreement and the consequences of non-compliance.

Finally section 86F provides that where a default sum becomes payable under a regulated agreement by the debtor, the debtor shall only be liable to pay simple interest.

Section 129 of the 1974 Act made important provision for a debtor to apply to re-schedule his debt by applying for a time order, which he would typically do either after service of a default notice, or once proceedings had been commenced to enforce the regulated agreement or recover possession of land.

Section 16 of the 2006 Act now inserts additional provisions in section 129A of the 1974 Act, enabling a debtor to make an application under section 129 after he has been given a notice under sections 86B or C (notices of sums in arrears) and following the service by the debtor of a notice under section 129A (2). A notice is within that subsection if it (a) indicates that the debtor intends to make the application, (b) indicates that he wants to make a proposal to the creditor in relation to his making payments under the agreement, and (c) gives details of that proposal.

Judicial control

Practitioners will be aware that sections 137-140 of the 1974 Act made detailed provision for the re-opening of extortionate credit bargains so as to do justice between the parties, and that these provisions applied irrespective of whether the bargain in question was a consumer credit agreement regulated by the Act, and irrespective of the level of credit provided.

Under section 138(1), a credit bargain was extortionate if it (a) required the debtor to make payments which were grossly exorbitant or (b) otherwise grossly contravened ordinary principles of fair dealing.

Sections 138(2) to (5) then set out various factors to which the court was to have regard including, in relation to the debtor, interest rates prevailing at the time when the credit bargain was made; the age, experience, business capacity and state of health of the debtor and the degree to which, at the time of making the credit bargain, he was under financial pressure, and the nature of that pressure. An in relation to the creditor, the degree of risk accepted by him having regard to the value of any security provided; his relationship to the debtor; and whether or not a colourable cash price was quoted for any goods or services included in the credit bargain.

Section 139 then set out the basis and extent to which the court might re-open a credit agreement with a view to reliving the debtor or a surety from payment of any sum in excess of that fairly due and reasonable.

Sections 137-140 of the 1974 Act are to be repealed on a date to be appointed.

Sections 19-22 of the 2006 Act introduce a new scheme of judicial control by inserting new sections 140A to 140D.

The amendments introduce a new concept of "unfair relationships" between creditors and debtors.

The court is empowered to make an order under s 140B if it determines that the relationship between the creditor and the debtor arising out of a credit agreement is unfair because of one or more of the following:
    (a) any of the terms of the agreement or of any related agreement;

    (b) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;

    (c) any other thing done (or not done) by or on behalf of the creditor (either before or after the making of the agreement or any related agreement).
Further in deciding whether to make a determination the court shall have regard to all matters it thinks relevant, and notwithstanding that the relationship between the creditor and debtor may have ended.

Under section 140B, the court is given extensive powers including ordering the repayment of sums paid, reducing or discharging any sums payable, directing the return of property, setting aside or varying the terms of the agreement etc.

Significantly, by section 140B(4), an application made by the debtor or a surety may only be made in England and Wales to the county court.

Section 140C deals with the interpretation of sections 140A and B, and section 140D provides that the advice and information published by the Oft under section 229 of the Enterprise Act 2002 shall indicate how the OFT expects sections 140A to C of the Act to interact with Part 8 of that Act (see sections 210-236 which deals with the enforcement of certain consumer legislation and the role of the OFT).

© Nigel Clayton

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