The Requirements of the Credit Act - Case Study Example

Consumer Credit Act of 1974 Introduction: The development of the credit phenomenon is equivalent to money lending in that exorbitant rates of interest may be charged to consumers for the privilege of paying for services through the use of credit rather than cash. The Credit Act of 1974 is significant in that it seeks to protect the interests of consumers by providing for their protection in several ways. Notably, it achieves this objective by regulating the contents of agreements and by filtering out extortionate agreements that may be unconscionable and unfair to one of the parties, usually the consumer. However, in protecting the interests of consumers, the Act does not go to the other extreme of compromising the interests of lenders. Since one of the requirements of the Act is that lenders and businesses offering credit are to seek a license before they can enter the business of credit, therefore the Act also protects the interests of genuine lenders by enforcing the repayment of debts that consumers may incur, which cannot be easily escaped. One of the notable provisions of the Consumer Credit Act of 1974 which has often been questioned is Section 127(3) which allows for certain agreements t be completed nullified if they are considered extortionate. This is one of the radical reform measures being undertaken through the new Consumer Credit Act of 2006, which does away with this provisions and introduces some fresh measures for the protection of lenders, such as allowing a wider range of small businesses to also enjoy the protection afforded to individuals. However, the scrutiny and screening of lenders and donors of credit has also increased considerably through the enhanced powers that are provided to the OFT under the new Act of 2006. The Consumer Credit Act of 1974: The Consumer Credit Act of 1974 is specifically formulated to regulate all consumer credit and consumer hire arrangements that deal with amounts that are less than 25,000 pounds (www.dti.gov.uk). Therefore at the outset, by regulating such low cost transactions, it works to the benefit of average low and middle income consumers rather than targeting the rich and wealthy who are few in number. The Act also lays out a definition of the range of individuals who are to be protected by the Act . One of the ways in which the Act protects consumers is by laying down the form and contents which agreements are to be composed of, providing redressal procedures that must be adopted in case there is a default or a termination of the credit arrangement by either party and by disallowing extortionate credit bargains. For example, Section 127 (3 to 5) of the Consumer Credit Act of 1974 automatically renders certain agreements between lenders and borrowed unenforceable if certain information that is required has not been included in the agreement between the parties. But as pointed out recently by Julie Exton (2006) in an examination of the new Consumer Credit Act of 2006 which is intended to replace the Consumer Credit Act of 1974, this particular section has been repealed in the interest of also protecting the interests of the lenders and businesses who advance credit to the consumers. Therefore, while the provisions of the Credit Act are mainly geared towards the protection of consumers, they are also fairly balanced to the interests of the businesses offering credit as well, in order to ensure that their interests are also protected. The Consumer Credit Act of 1974 also protects consumers by requiring certain businesses like finance companies, hire purchase agencies, debt collectors and retailers to purchase consumer credit licenses before they are allowed to pursue the business of credit. The issue of such licenses is controlled by Consumer Credit Licensing Bureau of the Office of Fair Trading and trading without a license could constitute a criminal offense.(www.oft.gov.uk). The Office of Fair Trading seeks to protect the interests of consumers in ever way and regularly investigates markets which do not appear to be meeting the needs of consumers. It also conducts exploratory studies to investigate whether the markets are working appropriately to meet the needs of the consumers. Exxon points out that the powers of the Office of Fair Trading have also been enhanced under the new Act that is proposed. This will widen the scope of the powers available to the OFT in the issue of licenses to traders and those offering credit to ordinary consumers, since it allows the OFT to examine the applications of creditors to determine whether they are fit to hold a license. The OFT is also provided increased powers to investigate license holders, to require additional information from them and issue penalties if discrepancies are found. As a result, it may be seen that every effort is being made to add teeth to the already existing provisions of the Consumer Credit Act of 1974, in order to offer enhanced protection to consumers. The reforms proposed under the new Consumer Act of 2006 however, also take into account the rights of lenders by increasing the 25,000 pounds limit that falls under the purview of the Act, by widening the range of individuals who may be included under that category, i.e, even small businesses may be eligible to be counted as individuals under the revised Act. One example that may be cited where the Consumer Credit Act was called into play and helped to protect the interests of the consumer is the case of London North Securities v Meadows. (Smith 2005). In this case, the liability of the consumer had jumped from the sum of 5750 pounds advanced in 1989 to 300,000 pounds by the date of the trial in 2004. As a result of this extortionate jump, attention was drawn to the very high APR rate that had been charged to the consumer – a whopping 39.4%. This agreement between the consumer and the lender was therefore deemed to be an extortionate credit bargain and under the provisions of the Consumer Credit Act of 1974, was held to be unenforceable. This was particularly so, because the Act regulates amounts below 25,000 pounds. However the basis on which the Jude arrived at his decision was not necessarily unfair to the lender in any way. Since prevailing interest rates in 1989 were in the range of 39.4, the levy of such interest rate in itself did not make the agreement an extortionate one. Rather it was the compounding of the interest and the levy of similarly high interest rates on costs and charges, which rendered the agreement extortionate. Therefore, this case shows how the Consumer Credit Act does take into account the rights of both parties and allows higher interest rates to be charged where market conditions dictate it, however the terms of the agreement cannot be such that they are extortionate. The Consumer Credit Act may not always exact retribution from the lender, there are also provisions to account for borrowers reneging on their debts. The Act protects the interests of the lenders because Section 129 of the Consumer Credit Act provides for “the payment of sums owed by such instalments and at such times as the court thinks reasonable having regard to the borrowers means”. As a result, the Act protects the interests of both parties to a credit agreement. One of the most important ways by which revisions to the Act further protect the interests of lenders is by doing away with Section 172(3) of the old Credit Act of 1974. In the case of Wilson v First County trust Ltd (Havers and Hibbet, 2001). This case raised a very important issue – the question of human rights and its impact upon credit relations. In this case, a pawn broker found himself unable to recover a sum of 5000 pounds that he had lent and he was also unable to recover those monies through the pawn of the Mercedes Benz that he had taken as security. As per the terms of the Credit Act, both parties are required to comply with the formalities required in the execution of credit agreements. In the event that such formalities are not properly executed, then Section 65 of the 1974 Act states that a Court order will be required before the terms of such an agreement can be enforced. In such an event, the Court is to take into consideration all the facts of the case, including the credit worthiness of the lender and any prejudice to the borrower or blame to be attributed to the lender before arriving at a decision on the matter. But the aspect that was at issue in this case was the fact that when a buyer has not placed his signature on a document which lays out all the regulations and prescribed terms that are to be adhered to, then even the Court option is negated and Section 127(3) of the Act prevents the Court from making an enforcement order. This was the situation that the pawnbroker found himself in and this is an example of the inequity that was being caused to lenders in some instances through this provision of the Consumer Credit Act. Therefore this case again raised the need to dispel this provision, which ha snow been carried out in the 2006 Consumer Credit Act, thereby removing any inequity – both to consumers and to the credit donors. Conclusions: In conclusion therefore, it must be stated that the Act seeks to regulate the interests of consumers through the introduction of a rigorous procedure to screen credit agencies and to discover their credit worthiness and their reliability and integrity. Moreover, since the Act is primarily concerned with sums that are less than 25,000 pounds, it is geared in the support of the interests of low income and middle income consumers who may often be the victims of loan sharks that fleece them through offering credit at exorbitant rates of interest. Moreover, all lender snd credit donors are required to become licensed and snce the major objective of the Office of Fair Trading, which issues such licenses is to bring about a fair market, the interests of consumers are safeguarded through the exhaustive checks and market watches that are promoted through the OFT. Through the inclusion of the provision whereby extortionate agreements can be rendered nullified, consumers can also be protected from those loan sharks who may try to coerce them into agreements that are not standard. By also requiring the scrutiny of agreements and their adherence to a particular format, additional safety is provided for the consumers, who may not be in a superior bargaining position of the lender through its knowledge of the market. Therefore the naiveté and innocence of the buyer/consumer are provided for under the Act. However, the Act also does not ignore the interests of lenders, especially after the rigorous scrutiny that they are expected to go through. In particular, the Courts are allowed to require borrowers to pay back their loans in amounts that they can manage, and therefore the Act does not provide for the shunning of an agreement unless it is indeed extortionate. Moreover, the revised provisions of the Consumer Act of 2006 that have done away with section 127 (3) that did not allow the Court to enforce an agreement where a buyer has not signed the standard form of agreement is a progressive move in favor of lenders, since it helps them to collect on their debts. Therefore on the whole, it may be stated that the Consumer Credit Act of 1947 tries to balance the interests of both consumers and lenders by allowing for the maximum possible precautions and the provision of standardized agreements to bring about some measure of uniformity and equality into credit agreements. Recourse is available to both the consumer and the lender through the Courts. The new Act of 2006 has taken care of the single limiting factor that was identifiable in the earlier Consumer Credit Act of 1974. References: * “Consumer Credit Act of 1974” [online] available at: http://www.dti.gov.uk/consumers/consumer-finance/credit-act-1974/index.html * “Consumer Credit Act” [online] available at: http://www.oft.gov.uk/advice_and_resources/resource_base/legal/cca/ * Exton, Julie, 2006. “Benchmarks: In the consumers’ best interests.” Law Society Gazette, 103(36): 38 * Havers, Philip and Hibbet, William, 2001. “Practice points – a worthy decision – the implications of legislative change to section 127 (3) of the Consumer Credit Act of 1974. Law Society Gazette, 98(23): 46 * Smith, Greame, 2005. “Benchmarks: Coming to terms with credit agreements.” Law Society gazette, 102 (12): 27 Read More