Unit 2 Topic 22 - Consumer Credit

Question 1

What does the Consumer Act 1974 apply to?

Answer 1

• Those providing credit
• Advice on obtaining credit
• Advice on repaying debts

Question 2

What does the provision of credit include (Consumer Credit Act 1974)?

Answer 2

• Personal loans.
• Overdrafts
• Hire Purchase
• Credit Cards
• Store Cards

Question 3

What product is exempt from the Consumer Credit Act?

Answer 3

Regulated mortgages as they are covered by MCOB, regardless of the purpose of which they are required.

Question 4

What is the limit the Consumer Credit Act 1974 regulates?

Answer 4

£25,000.

Question 5

What are the two main factors that are taken into account in the calculation of APR?

Answer 5

• The interest rate - whether it is charged on a daily basis, monthly or annual basis.
• The additional costs and fees charged when arranging the loan, such as an application fee.

Question 6

What is APRC and how does it differ from APR?

Answer 6

Annual Percentage Rate of Change.

Applies to first- and second-charge mortgage lending. APR applies to personal loans, credit cards and hire purchase agreements.

Question 7

How did the Consumer Credit Act 2006 modify the definition of ‘individuals’?

Answer 7

Individuals under the Act widened from ‘natural persons’ to include unincorporated associations, small partnerships (with three partners or fewer) and sole traders.

Question 8

What did the Financial Ombudsman Service (FOS) increase the scope to include under the Consumer Credit Act 2006 ?

Answer 8

Expanded to cover Consumer credit agreements.

Question 9

Outline the Unfair Relationships Test, introduced as part of the Consumer Credit Act 2006.

Answer 9

The test enables borrowers to challenge a credit agreement in court, on the basis the nature of the relationship between borrower and lender is unfair.

Question 10

How did the Consumer Credit Act 2006 affect the £25,000 upper limit on the size of loans regulated by the Act?

Answer 10

It was removed: all new credit agreements entered into by individuals are regulated.

Question 11

What did CCA provisions introduce wrt to Consumer Credit Act 2006?

Answer 11

An exemption for high net-worth borrowers, with the definition of a high-net-worth individual detailed in the Act.

Question 12

What change did the EU Credit Direct bring relating to cost of credit?

Answer 12

A representative example must be included as part of any advertisement that shows an interest rate or a figure relating to the cost of credit.

This example must include a ‘representative’ APR.

Question 13

What change did the EU Credit Direct bring relating to borrower’s creditworthiness?

Answer 13

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

Question 14

What change did the EU Credit Direct bring relating to ‘Adequate explanations’?

Answer 14

‘Adequate explanations’ must be provided in respect of a proposed credit agrement, to enable the borrower to assess whether the agreement meets their needs.

Question 15

What change did the EU Credit Direct bring relating to the providing of information?

Answer 15

Certain information must be provided to a borrower before they enter into a credit agreement, and there are standards for the way in which that information must be provided. Pre-contractual information must be given in good time before the borrower enters into the agreement, and the information must be clear and easily legible.

Question 16

What change did the EU Credit Direct bring relating to withdrawing from a credit agreement?

Answer 16

The borrower has the right to withdraw from a credit agreement within a period of 14 days from the conclusion of the agreement, or from the point the borrower receives the agreement, if this is later.

Question 17

What change did the EU Credit Direct bring relating to interest rate changes?

Answer 17

The borrower must be notified, in writing, of changes to the interest rate under the agreement, before the change takes effect.

Question 18

What change did the EU Credit Direct bring relating to seeking redress?

Answer 18

The borrower is able to seek redress from the creditor in certain circumstances if they are unable to obtain satisfaction from the supplier of the gods or services.

This applies in cases where the CCAs would not normally provide for such redress, and where the value of gods or services is more than £30,000 and the credit does not exceed £60,260.

Question 19

What change did the EU Credit Direct bring relating to open-ended agreements?

Answer 19

The borrower can terminate an open-ended agreement at any time, subject to giving one month’s notice. The creditor must give two months’ notice of termination of credit and must give justified reasons for termination.

Question 20

What change did the EU Credit Direct bring relating to third parties?

Answer 20

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

Question 21

What change did the EU Credit Direct bring relating to credit intermediaries?

Answer 21

Credit intermediaries must disclose the extent to which they are acting independently or work exclusively with one or more creditors. Any fee payable to the intermediary must be disclosed upfront.

Question 22

What change did the EU Credit Direct bring relating to application for credit?

Answer 22

Where an application for credit is declined based on information supplied by a credit reference agency, the creditor must notify the borrower and provide contact details of the credit reference agency.

Question 23

Define Representative APR.

Answer 23

An APR that applies to 51% or more of successful applicants for the credit product.

Question 24

Define Credit Intermediary.

Answer 24

Helps an individual to obtain credit, eg by helping them to complete a loan application, or find the lender offering the best rates or willing to lend to those with a poor credit history.

Question 25

What is the cap introduced by the FCA on high-cost, short-term credit from 2 Jan 2015?

Answer 25

Interest and fees charged must not exceed 0.8% per day of the amount borrowed, default fees cannot exceed £15, and borrowers must never be required to repay more than 100% of the amount borrowed by way of fees and charges.

Question 26

Outline CONC I: Application and purpose and guidance on financial difficulties.

Answer 26

Explains the purpose of CONC as a specialist sourcebook for credit-related regulated activities, and reminds firms that the eleven Principles for Businesses apply. There is also guidance on the FCA’s indicators that a customer is in financial difficulty.

Question 27

Outline CONC 2: Conduct of business standards - general

Answer 27

In respect of their credit-related activities, all providers are expected to treat customers fairly and not mislead them. Examples of activities that may contravene these rules are:
- targeting customer with offers of credit that are unsuitable for them;

• high-pressure selling, aggressive or oppressive behaviour or coercion;
• not allowing sufficient and reasonable time to make repayments;
• taking steps to repossess a customer’s home other than as a last resort.

Question 28

Outline CONC 3: Financial promotions and communications with customers

Answer 28

This section details what is considered to be a ‘communication’ with a customer in relation to a credit agreement, and advises that communications should be fair and not misleading. Providers must ensure they use plain and understandable language, specify who is making the offer of credit and only make credit available based on the consumer’s financial circumstances.

CONC also introduces new rules relating to risk warnings for high-cost, short-term credit, such as that offered by payday lenders. Any such lending must carry the message: ‘Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk’

Question 29

Outline CONC 4: Pre-contractual requirements.

Answer 29

Deals with the content of quotations for credit and the relevant ‘health warnings’ that must be included. This is particularly significant when the customer’s home is to be used as security. In such circumstances the lender must include the statement: ‘Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it’

CONC 4 also details the information a lender must provide about interest rates, charges and costs should the borrower be unable to pay.

Question 30

Outline CONC 5: Responsible lending.

Answer 30

Details what a provider must do before making credit available in order to ensure that the customer can afford to maintain payments in respect of their borrowing.

Creditworthiness must be confirmed based on information obtained from the prospective borrower and from a credit reference agency.

Question 31

Outline CONC 5A: Cost cap for high-cost, short-term credit

Answer 31

Details the maximum charges that can be applied for high-cost, short-term credit (such as that provided by payday lenders). Broadly speaking, the payment of any charge, when combined with other charges applied under the terms of the agreement, cannot exceed an amount more than that borrowed.

Question 32

Outline CONC 6: Post-contractual requirements.

Answer 32

Covers the checks a lender must undertake if they significantly increase the lending to a customer under a regulated agreement, eg increasing an overdraft or the credit limit on a credit card. Creditworthiness must be assessed if there is a significant increase in lending.

This section also details the action a lender must take if a customer exceds their overdraft limit, which is to contact the customer in writing without delay.

Question 33

Outline CONC 7: Arrears, default and recovery (including repossessions).

Answer 33

CONC 7 states that providers must have appropriate policies and procedures for dealing with customers whose accounts fall into arrears, and must treat such customers fairly and reasonably. This includes being aware of customers who are considered vulnerable, for example, customers with mental health difficulties.

Another aspect of this regulation is that it covers debt collection and debt administration activities, and the organisations that undertake such work. This area of consumer credit was previously unregulated.

Question 34

Outline CONC 8: Debt advice.

Answer 34

Debt advice can be undertaken by third-party debt counsellors and other organisations that provide information. Failure to pay proper regard to the different debt-solution options available to consumers, or to the differences in enforcement actions and procedures available, is likely to contravene the Principles for Business.

Question 35

Outline CONC 10: Prudential rules for debt management firms

Answer 35

Details the rules for debt management firms (those that manage repayments to creditors on behalf of an individual) and small, not-for-profit debt advice bodies to ensure that the relevant financial and management resources are in place.

Question 36

Outline CONC 11: Cancellation

Answer 36

Covers the cancellation rights of peer-to-peer lenders and those providers that make services available over the internet.

Question 37

Outline CONC 12-15 and Appendix I

Answer 37

Deal with some of the less common areas of consumer credit. Appendix 1 contains the rules relating to the total charge for credit, what it applies to and how it is cancelled.

Question 38

If a lender rejects an application on the basis of information from a credit reference agency, what must the lender do?

Answer 38

Advise the applicant of the reason for rejecting their application and provide details of the credit reference agency used.