Topic 22

Question 1

What is the main purpose of the Consumer Credit Act 2006?

Answer 1

The Consumer Credit Act 2006 regulates certain loans to individuals, small partnerships, and unincorporated bodies, aiming to increase borrower protection and meet the needs of the modern marketplace. It builds on the Consumer Credit Act 1974.

Question 2

Which entity regulates consumer credit activities since April 2014?

Answer 2

Since April 2014, the Financial Conduct Authority (FCA) has regulated consumer credit activities.

Question 3

What is the role of the CONC sourcebook?

Answer 3

The CONC sourcebook contains FCA rules on the marketing, selling, disclosure, customer information, debt handling, and administration of consumer credit, ensuring firms treat customers fairly.

Question 4

Are regulated mortgages covered under the Consumer Credit Act?

Answer 4

No, regulated mortgages, including loans secured on a main residence, are exempt from the Consumer Credit Act and are instead regulated under the Mortgages and Home Finance: Conduct of Business rules (MCOB).

Question 5

What is the cooling-off period under the Consumer Credit Act 2006?

Answer 5

Borrowers have a 14-day cooling-off period from the later of the contract starting or receipt of a copy of the agreement, allowing them to cancel the agreement and repay any money received with interest.

Question 6

Which agreements are exempt from the cooling-off period?

Answer 6

Agreements exempt from the cooling-off period include bank overdrafts, small loans of £50 or less (unless hire purchase or conditional sales), small loans of £35 or less completed away from the lender’s premises, and loans for death duties.

Question 7

What does the APR (Annual Percentage Rate) represent?

Answer 7

The APR represents the total cost of borrowing, including interest and additional fees, and is used to allow a fair comparison between different lenders’ offers.

Question 8

How is the APR calculated?

Answer 8

The APR is calculated by considering the interest rate (charged on a daily, monthly, or annual basis) and additional costs/fees associated with setting up the loan.

Question 9

What is the APRC (Annual Percentage Rate of Charge)?

Answer 9

The APRC, introduced in 2016 under the EU Mortgage Credit Directive, is similar to the APR but applies to first- and second-charge mortgage lending. It aims to provide a clearer cost comparison for mortgage products.

Question 10

What is the purpose of the Consumer Credit Directive (CCD)?

Answer 10

The CCD regulates all consumer credit agreements, other than those secured on land, under the Consumer Credit Acts (CCAs), ensuring transparency and borrower protection.

Question 11

What is required in advertisements under the Consumer Credit Directive?

Answer 11

Any advertisement showing an interest rate or credit cost must include a ‘representative’ APR as part of the advertisement.

Question 12

What must creditors assess before granting or significantly increasing credit?

Answer 12

Creditors must assess the borrower’s creditworthiness before granting or increasing the amount of credit.

Question 13

What must be provided to borrowers regarding credit agreements?

Answer 13

Creditors must provide adequate explanations about the credit agreement, allowing borrowers to assess if it meets their needs, and certain pre-contractual information must be provided clearly and in good time.

Question 14

What is the cooling-off period for credit agreements under the Consumer Credit Directive?

Answer 14

Borrowers have 14 days from the conclusion of the agreement or from receiving the agreement to withdraw from the credit agreement.

Question 15

What must creditors notify the borrower about under the Consumer Credit Directive?

Answer 15

Creditors must notify the borrower in writing of any changes to the interest rate before the change takes effect.

Question 16

Can borrowers seek redress if dissatisfied with a supplier under the Consumer Credit Directive?

Answer 16

Yes, borrowers can seek redress from the creditor in certain cases, especially if the value of goods or services exceeds £30,000, and the credit does not exceed £60,260.

Question 17

How can a borrower terminate an open-ended credit agreement under the Consumer Credit Directive?

Answer 17

The borrower can terminate the agreement at any time with one month’s notice. The creditor must give two months’ notice and justify the termination.

Question 18

What must be disclosed if a debt is sold to a third party?

Answer 18

The borrower must be informed in writing if the debt is to be sold to a third party.

Question 19

What must credit intermediaries disclose under the Consumer Credit Directive?

Answer 19

Credit intermediaries must disclose whether they act independently or work exclusively with one or more creditors and must disclose any fees upfront.

Question 20

What happens when an application for credit is declined based on credit reference agency information?

Answer 20

The creditor must notify the borrower and provide the contact details of the credit reference agency.

Question 21

What is a representative APR?

Answer 21

A representative APR is the APR that applies to 51% or more of successful applicants for a credit product.

Question 22

What is a credit intermediary?

Answer 22

A credit intermediary helps individuals obtain credit by assisting with loan applications or finding the best rates or lenders, including those willing to lend to individuals with poor credit histories.

Question 23

What is required for consumer credit firms under FCA regulation?

Answer 23

Consumer credit firms must be authorised by the FCA to operate.

Question 24

What does the FCA maintain regarding consumer credit firms?

Answer 24

The FCA maintains a register of firms that have been granted a consumer credit licence.

Question 25

What rules apply to firms offering consumer credit under FCA regulation?

Answer 25

FCA conduct rules apply, such as the high-level Principles for Businesses, ensuring financial promotions are clear, fair, and not misleading.

Question 26

What is the FCA's expectation regarding the treatment of customers by consumer credit firms?

Answer 26

The FCA expects firms to comply with the Consumer Duty and demonstrate how they ensure the fair treatment of customers.

Question 27

How do the FCA's supervisory powers compare to the Office of Fair Trading (OFT)?

Answer 27

The FCA has greater supervisory powers, using its senior managers and certification regime to approve individuals performing roles that require FCA approval or certification.

Question 28

How does the FCA's enforcement power compare to the OFT's?

Answer 28

The FCA has more powerful enforcement and investigation capabilities, with dedicated supervision teams to tackle poor practices in the industry.

Question 29

What area of consumer credit has the FCA focused on, particularly with regard to payday lenders?

Answer 29

The FCA has focused on high-cost, short-term credit, such as payday lenders, who provide loans for short-term needs.

Question 30

What changes did the FCA introduce to the high-cost, short-term lending market?

Answer 30

The FCA introduced a cap on interest and fees, limiting them to 0.8% per day of the amount borrowed, with default fees capped at £15. Borrowers cannot repay more than 100% of the amount borrowed in fees and charges.

Question 31

What are the two authorisation tiers the FCA uses for consumer credit activities?

Answer 31

The two authorisation tiers are full permission and limited permission.

Question 32

What does the full permission tier cover under FCA authorisation?

Answer 32

The full permission tier covers activities like credit broking, debt administration, lending, credit reference agency services, and peer-to-peer lending.

Question 33

What is the limited permission tier for FCA authorisation?

Answer 33

The limited permission tier applies to businesses carrying out lower-risk activities, and they must supply less information to the FCA compared to those requiring full authorisation.

Question 34

What is CONC?

Answer 34

CONC (Consumer Credit sourcebook) is a set of rules and guidance introduced by the FCA in April 2014 to regulate credit-related activities. It provides a framework for businesses involved in consumer credit to ensure fair treatment of consumers and compliance with regulatory standards.

Question 35

What does CONC 1 cover?

Answer 35

CONC 1 explains the purpose of CONC, providing a framework for credit-related activities, and includes guidance on recognising when a customer is in financial difficulty.

Question 36

What does CONC 2 require from credit providers?

Answer 36

CONC 2 establishes conduct standards for credit providers, mandating fair treatment, avoiding misleading practices, and prohibiting high-pressure selling, coercion, and unfair repossession practices.

Question 37

What are the requirements under CONC 3 for financial promotions?

Answer 37

CONC 3 specifies that communications must be clear, fair, and not misleading. Credit offers should be based on the consumer’s financial situation, and high-cost, short-term credit must include a risk warning message.

Question 38

What is required in pre-contractual information under CONC 4?

Answer 38

CONC 4 outlines requirements for quotations, including health warnings when the customer's home is used as security, and details about interest rates, charges, and costs.

Question 39

What does CONC 5 state about responsible lending?

Answer 39

CONC 5 mandates that creditworthiness must be confirmed through checks, including credit reference agency information, before making credit available to ensure customers can afford the borrowing.

Question 40

What does CONC 5A address regarding high-cost, short-term credit?

Answer 40

CONC 5A introduces a cost cap for high-cost, short-term credit, ensuring that the total charges do not exceed the amount borrowed.

Question 41

What is the rule for rent-to-own agreements under CONC 5B?

Answer 41

CONC 5B imposes a 100% cap on the total credit cost for rent-to-own agreements, meaning firms cannot charge more than the price of the product, and prices must be compared with mainstream retailers.

Question 42

What does CONC 5C require for overdraft pricing?

Answer 42

CONC 5C requires firms to ensure overdraft charging structures are transparent, simple, and comparable, and prohibits higher charges for unarranged overdrafts than for arranged overdrafts.

Question 43

What does CONC 5D focus on regarding overdraft repeat use?

Answer 43

CONC 5D requires firms to monitor overdraft use, identify patterns of repeat use, and take appropriate steps to address them.

Question 44

What are the post-contractual requirements under CONC 6?

Answer 44

CONC 6 specifies that if credit is significantly increased (e.g., credit limit or overdraft), the lender must assess creditworthiness. It also requires action if a customer exceeds their overdraft limit.

Question 45

What does CONC 7 state regarding arrears and defaults?

Answer 45

CONC 7 mandates that providers have policies for dealing with arrears and defaults, ensuring customers, especially vulnerable ones, are treated fairly and reasonably.

Question 46

What is outlined in CONC 8 regarding debt advice?

Answer 46

CONC 8 ensures that debt advice is provided responsibly, prohibiting the recommendation of unaffordable solutions and ensuring consumers are aware of all available debt options.

Question 47

What does CONC 10 cover for debt management firms?

Answer 47

CONC 10 sets prudential rules for debt management firms, ensuring they have adequate financial and management resources in place to operate effectively.

Question 48

What does CONC 11 cover for peer-to-peer lending?

Answer 48

CONC 11 outlines cancellation rights for peer-to-peer lenders and providers offering services over the internet.

Question 49

What does CONC 12–15 cover?

Answer 49

CONC 12–15 deals with less common areas of consumer credit and includes rules on calculating the total charge for credit and the applicable charges.