The Guidance, which should be referred to by all businesses engaged in the recovery of consumer credit debts (e.g. debt collectors, banks and law firms), sets out the standards that the OFT expects all parties engaging in the recovery of such debts to adhere to.

The Guidance is divided into the following chapters:

1. Introduction. This sets out how the ‘fitness test’ under section 25 of the Consumer Credit Act 1974 applies to debt recovery activities;

2. Overarching principles of fair business practice. This sets out the FSA’s overarching principles of consumer protection and fair business practice that apply to all debt recovery activities. This chapter explains that businesses should treat debtors fairly, be transparent, exercise forbearance and consideration, and act proportionately. They should also establish and implement clear, effective and appropriate policies and procedures (especially for dealing with vulnerable debtors);

3. Unfair or improper business practices. This sets out the behaviours that the OFT considers to be unfair or improper business practices for the purposes of section 25(2A)(2) of the Consumer Credit Act 1974 (e.g. using Facebook or Twitter to contact debtors.) If these are engaged in, they may call into question a person’s fitness to retain, or be granted, a consumer credit licence;

4. Regulatory compliance and enforcement. This outlines the OFT’s approach to securing compliance and provides information on the regulatory options available to the OFT.

The OFT has said that it will shortly update its Irresponsible Lending Guidance to reflect this revised version of Debt Collection Guidance.

The difficulty many of the banks faced was that they could not locate the original agreement although they could provide information from their records.  On 23 December 2009, His Honour Judge Waksman QC after selecting a number of test cases held that a creditor was not obliged by section 78 to provide the debtor with a copy of the original agreement, but could meet its obligations by providing the information contained in that agreement drawn from other records.  As a result of this decision many of the cases were simply discontinued. 

In March 2010, seven cases including the two under appeal here, were brought before Judge Waksman on an application by the claimants that despite the orders against them, they should be entitled to their costs from the banks. The Judge summarised the principles relating to discontinuance as follows: 

• When a claimant discontinues the proceedings, there is a presumption by reason of CPR 38.6 that the defendant should recover his costs, the burden is on the claimant to show a good reason for departing from that position;
• The fact that the claimant would or might well have succeeded at trial is not a sufficient reason for departing from the presumption;
• However, if it is plain that the claim would have failed, that is an additional factor in favour of applying the presumption;
• The mere fact that the claimant’s decision to discontinue may have been motivated by practical, pragmatic or financial reasons as opposed to a lack of confidence in the merits of the case will not suffice to displace the presumption;
• If the claimant is to succeed in displacing the presumption he will usually need to show a change of circumstances to which he has not himself contributed;
• However, no change in circumstances is likely to suffice unless it has been brought about by some form of unreasonable conduct on the part of the defendant which in all the circumstances provides a good reason for departing from the rule. 

On this basis, the Judge held that the claimants should pay the defendant’s costs.  Two of the claimants appealed.  Following Judge Waksman’s decision, further guidance was given in the case of Messih v MacMillan Williams where it was decided that a claimant who seeks to persuade the court to depart from the normal position must provide cogent reasons for doing so and is unlikely to satisfy that requirement save in unusual circumstances. 

The appellants’ position was that they had both brought proceedings to obtain performance by the bank of its obligations under section 78 of the Act and had discontinued as soon as they had obtained what they were seeking and so should be entitled to their costs.  In substance they claimed that they had been successful. 

The Court of Appeal, held that the claimants may have had a legitimate interest in seeking a copy of the agreement, but it does no follow that the debtor has the right to bring proceedings at the creditor’s expense in order to obtain relief which goes beyond what he is entitled to obtain under the statute or relief by way of a declaration which has no practical utility.  

In the light of the way the proceedings were conducted, the Court of Appeal was unable to accept that the proceedings were brought simply to obtain a copy of the original credit agreement.  With respect to Ms Brookes, the bank was not unwilling to provide the information; it was unable to provide a copy of the original agreement that the claimant was seeking to establish as the basis for making good her contention that the agreement was unenforceable.  The real purpose of her claim had been to obtain a decision that the provision of a reconstituted agreement was not sufficient to comply with its duty under section 78.  Accordingly, the decision to order her to pay the bank’s costs was correct. 

In Mr Jemitus’ case, his real purpose was not to obtain a copy of the agreement, but to establish that in the absence of a copy of the agreement, the debt was unenforceable.  Once the bank produced a copy of the original agreement the case inevitably collapsed.  If the claimant had not sought more than the copy of the agreement it is unlikely that proceedings would have been issued at all.  He had asked for more extensive relief and accordingly he was liable to pay the costs. 

This case is good news for the banks.  Although the claimants asserted that they were successful, the Court of Appeal was able to see through this argument and to ascertain that the true purpose of the claims was to try to establish that the debts were unenforceable, which had been unsuccessful. 

Erica Brookes v HSBC Bank Plc and Jemitus v Bank of Scotland Plc [2011] EWCA Civ 354

Trading Standards Officers conducted onsite visits, a website sweep and a mystery shopping exercise.  They found that:

• Misleading advertising is the most significant area of non-compliance, in particular failing to disclose fees and misrepresenting debt management services as being free when they are not;
• Frontline advisers working for debt management companies are lacking in competence and are providing poor advice on inadequate information;
• There is low industry awareness of the Financial Ombudsman Service (FOS) for resolving consumer complaints.

 The OFT plan to update their Debt Management Guidance and will carry out robust enforcement action against licensees that fail, or refuse, to change advertising and/or behaviour.

 Attached is a link to the detailed report http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/OFT1274.pdf and the Debt Management Guidance  http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/oft366.pdf.

The claimants alleged that the APR stated in the agreement should be regarded as the primary figure and the monthly interest rate should be calculated from and should correspond (as closely as possible) to the APR.  They produced an expert report from a mathematician and computer expert who concluded that the APR rates on the monthly cash advance balance rate were incorrectly stated.

A regulated agreement is not properly executed unless the agreement contains all the prescribed terms.  If improperly executed, it is only enforceable by an order of the court.  The court cannot grant such an order in respect of agreements signed before 6 April 2007 and so those agreements which did not contain all of the prescribed terms are irredeemably unenforceable.  The claimants alleged that the APR was misstated and as a consequence the agreements were unenforceable.

The Judge explained that there is a very clear difference between the nature and function of the stated monthly (or annual) rate and the APR. The stated monthly or annual rate is (on its face) a contractual term.  The APR is designed to provide information to consumers and is arrived at by a complex formula designed to include not only interest rates but also other charges.  The APR is not a prescribed term.  Merely because the APR is included does not make it a prescribed term of the agreement.  The APR is not the driver of the figures and in any event,  if it were,  it would be unworkable as the APR figure only needs to be stated at the inception of the agreement.

Accordingly the claims that the agreements were irredeemably unenforceable because of an alleged mismatch between the APR and the stated rate of interest were struck out.

This case involved calculating the interest rates retrospectively, which as the Judge pointed out had “a surreal quality to it”. In the light of the series of cases which have resulted in a positive outcome for lenders, this is yet another nail in the coffin for those who seek to use the courts to bring consumer credit related claims on a very tentative and speculative basis.

Sternlight v Barclays Bank Plc and others [2010] EWHC 1865

Please see the link for guidance.  The regulations come into force on 1 February 2011. 

The existing Consumer Credit Act regime is unchanged in relation to agreements secured on land and consumer hire agreements (although lenders may choose to comply with the new requirements in respect of agreements secured on land).

In summary, the regulations make amendments to the following:

•  The right to withdraw from the credit agreement and the requirement to provide adequate explanations.  Creditors are required to assess the borrower’s creditworthiness before granting credit or significantly increasing the amount of credit.  The borrower can withdraw from an agreement within 14 days following conclusion of the agreement or (if later) once the borrower has received a copy of the executed agreement or notification of the credit limit on a credit card.
• How to set out and calculate the total charge for credit and the annual percentage rate of charge (APR) in advertising and consumer information.
• What information to provide consumers before they enter into a credit agreement and the way in which that information must be provided. They largely replace regulations on the disclosure of pre-contractual information. The information must be clear and easily legible, and the borrower must be able to take it away to consider and to shop around if he wishes.
• What information must be included in a credit agreement and how it must be presented and the requirements on the signing of a credit agreement.
• What information must be included in advertisements for consumer credit agreements and how that information must be presented.  If an advertisement includes an interest rate or any amount relating to the cost of credit, it must also include a representative example.
• The borrower is entitled to seek redress from the creditor in certain circumstances if he is unable to obtain satisfaction from the supplier of goods or services.  This applies where s75 of the Consumer Credit Act is not applicable.

• How consumers enter into credit commitments, including the way in which credit is sold and the extent to which consumers understand what they are committing to;
• What issues arise during the lifetime of a loan from both the consumer and the lender perspectives; and
• What happens if things go wrong: are the current insolvency solutions fit for purpose?

A consultation on specific proposals is anticipated later this year or early 2011.

The Competition Commission initially announced its plans in October 2009, after its investigation found that banks and building societies faced “little or no” competition when selling PPI to their credit customers. However, the proposed ban was challenged by Barclays, supported by Lloyds Banking Group and Shop Direct Group Financial Services, who argued that a point-of-sale ban was unjustified and that it would inconvenience customers. 

Consequently, the Competition Appeal Tribunal ruled that further investigation was needed, but, after further analysis, the Competition Commission concluded that a ban would bring greater competition, more choice and lower prices – benefits that would outweigh any inconveniences for customers.

The key changes are as follows. 

• Adequate explanations.  A duty for lenders to provide adequate explanations to consumers about the credit on offer to enable them to decide whether it is suited to their needs and circumstances.  (Regulation 3 and 4 of the Directive).
• Assessment of creditworthiness.  An obligation for lenders to assess the creditworthiness of consumers before concluding a credit agreement or increasing the amount of credit available under an existing agreement.  Lenders can decide how to assess creditworthiness, but are required to base their assessment on information obtained from the consumer, where appropriate and from a credit reference agency, where this is necessary. (Regulation 5 of the Directive).
• Refusal of credit.  If an application is refused on the basis of information from a credit reference agency, the lender must inform the creditor of this when it declines the credit.  (Regulation 40 of the Directive).
• Right to withdraw.  The consumer has the right to withdraw from a credit agreement within 14 days without giving any reason.  This replaces the current more limited right to cancel some types of agreements in certain circumstances.  (Regulation 13 of the Directive).
• Assignments of debts.  If a debt is assigned, the consumer must be informed of this by either the lender who buys the debt or the lender who sold the debt.  (Regulation 36 of the Directive).
• Credit intermediary links.  Credit intermediaries must disclose their links to lenders and disclose and agree fees for their services with the consumer. (Regulation 41 of the Directive).
• Right to repay early.  The consumer has the right to repay an agreement early in part and to receive a reduction in the total cost of the agreement as a result.  The existing legal framework for full early repayment has been retained and extended to cover partial early repayment.  (Regulation 29-34, 59-62 and 77-84 of the Directive).
• Right to terminate.  The consumer has the right to terminate an open-end credit agreement at any time unless the parties have agreed that a period of notice not exceeding one month should be given.  The lender can also terminate subject to given the consumer at least two months’ written notice.  The lender can also terminate or suspend the consumer’s right to draw down an open-end credit agreement provided they give objectively justified reasons for doing so. (Regulation 37-38 of the Directive).

The Directive also amends or extends existing requirements:

• Advertisements.  Advertisements that contain specific information about the cost of the credit need to provide a representative example of a credit offer.  The Consumer Credit (Advertisement) Regulations 2010 will dispense with the typical APR approach.
• Pre-contractual information. Consumers must be given pre-contractual information in writing according to a specific format set out in the Directive. This information is set out in the Consumer Credit (Disclosure of Information) Regulations 2010.
• Contractual information.  Other contractual information required is set out in the Consumer Credit (Agreements) Regulation 2010.
• Unsecured overdrafts.  Non-business unsecured overdrafts will be subject to the requirements for both pre-contractual and contractual information although an overdraft can be arranged urgently without prior written information.  Where a current account allows the account holder to overdraw without a pre-arranged overdraft, information about the charges must be included in the agreement. (Regulation 19 of the Directive).
• Obligation of the creditor in respect of goods.  Where a credit agreement is used to purchase goods, the consumer can pursue the creditor for a remedy. The value of the goods must be at least £30,000, the credit agreement must be for £60,260 or less and the consumer must have tried to obtain satisfaction from the supplier first.  This supplements s75 of the Consumer Credit Act where the cash price of goods is not less than £100 and not more than £30,000. (Regulation 25 of the Directive).
• The total charge for credit and the APR.  The total charge for credit and the APR must be calculated in accordance with a specified formula.  The formula is different to the one which already applies in the UK , but the result it produces is the same and the assumptions are broadly similar.  (Total Charge for Credit Regulations 2010).
• Variation of interest rate.  Where an agreement allows for variation of an interest rate,  notice of variation must be provided to the consumer before the change takes effect.  This is similar to the current requirements. 

 There are two questions in the consultation:

The draft guidance consists of a document setting out the technical legal issues for businesses and consumer advisers, and a simpler version for consumers.

The consultation is open until 21 April 2010.  The technical legal advice makes the following points:

•  Consumers have been given an exaggerated expectation of what the creditor or owner must do in order to comply with an information request as a result of misleading claims by claims management companies and inaccurate information on the internet.
• A number of creditors, appear not to understand their obligations under these sections.
• The purpose of these sections is to provide information to the consumer, not to provide a method for consumers to avoid paying their debts.
• The OFT considers that the creditor in sections 77 and 78 and the owner in section 79 includes a person who has merely bought the debts under the agreement. 
• As well as assignees ensuring that they are able to obtain from the assignor copies of the agreements and documents and historical information on the account, the original creditor should ensure that if necessary and appropriate, it is able to readily obtain from assignees any necessary information on the most recent state of the account.
• The creditor should satisfy itself that the writer of the request has the proper authority to obtain the information.  If there is no authority with the request the creditor is entitled to reply by asking to see the authority.
• If the request comes from only one debtor where there are two or more debtors, it must be complied with and the response given to both or all debtors.
• The creditor is not entitled to charge more than £1.
• The creditor can send the documents by ordinary second class post to the address given in the request.
• It is wise to retain some record of posting.
• If a claims management company does not hold a license then the OFT would expect the creditor to inform the debtor/hirer  why the information is being sent direct to him and to notify the OFT and Ministry of Justice.
• The request should be complied within 12 working days after the receipt is received.  The day the request is received is not included, but it will include the day the information is sent.
• A true copy as confirmed in the recent case of Carey v HSBC Bank plc does not mean an exact copy.
• There is no obligation to provide a signed copy.  The creditor may be able to provide evidence that its practice was always to require a signature to its agreements.
• The creditor can reconstitute a copy of the agreement.  The name and address at the time of execution must be included, but this can be taken from any source available.
• If the reason why no copy of the agreement is given to a request under these sections is that there never was an executed agreement, the creditor should acknowledge this in its response.
• Where there has been a variation, the duty is to provide the original agreement, but a copy of the latest variation or a clear statement of the terms of the agreement as varied.
• Any copy must be easily legible.
• The consultation provides details of the documents to be provided.
• The consultation also provides details of the statements of account that should be provided.
• The duty does not apply if the agreement has been paid off or terminated.
• It does not apply where judgment has been obtained unless there is an interest-after judgment clause in the agreement which the creditor or owner has not expressly waived.
• If the creditor fails to comply with the duty, it is not entitled, while the failure to comply continues, to enforce the agreement.
• If sections cannot be complied with, the debt does not disappear and it is perfectly acceptable for a creditor to seek to pursue the debt and to register any arrears or default with a credit reference agency.
• If a creditor were to threaten court action, knowing that such action is not possible, this would be misleading and oppressive.
• Where an agreement is unenforceable because of non-compliance with the sections:
• The OFT would expect the creditor to take steps to check that there was an agreement and that there are monies outstanding.
• No communications or requests should threaten court action or other enforcement of the debt where the creditor is aware that it cannot or will not be entitled to enforce the agreement.
• The creditor should make it clear in communications that the debt is unenforceable.  Failure to do so would unfairly mislead the debtor.
• Where a creditor has satisfied itself that a debt does exist and is correctly described, it is acting fairly in registering a default with credit reference agencies and informing the debtor or hirer that it intends to do so. 

 Judge David Waksman held that the banks could satisfy its duty sunder s78 by providing a reconstituted version of the executed agreement which may be from sources other than the actual signed agreement itself.

It is estimated that claims management companies have been looking at  thousands of cases in an attempt to exploit s78 of the Act.  S78 imposes an obligation on the bank to provide a copy of the executed agreement under a regulated agreement for running-account credit within 12 days after receiving a request in writing from the debtor and a payment of a fee of £1.

Sometimes the banks were unable to provide an exact copy of the agreement and these claims management companies sought to claim that the debts were not enforceable.  The Judge disagreed although held that the s78 copy must contain the name address of the debtor as it was at the time of the execution of the agreement.  The creditor can provide the name and address from whatever source it has of those details.  It does not have to take them from the executed agreement itself.  If an agreement has been varied by the creditor under a unilateral power of variation, the creditor must still provide a copy of the original agreement, as well as the varied terms.

The Judge also decided that a breach of s78 this does not of itself give rise to an unfair relationship within the meaning of section 140A of the Act thus defeating a significant number of claims.

 This decision is truly a triumph of common sense.  When introduced, the aim of the Act was to release the credit industry from outdated restrictions and allow it to develop a framework to encourage competition whilst at the same time providing consistent and adequate protection for consumers across the whole spectrum of credit transactions.  The attempts by the claims management companies to exploit the provisions of the Act achieved none of these goals.

 This decision is certainly good news for the banks and what with the failure of the OFT in the Supreme Court to challenge bank charges, 2010 will have a more optimistic start.

The Office of Fair Trading wanted to bring a test case to see if banks’ current account charges were fair. In particular, it was concerned on behalf of consumer bodies that overdraft charges were excessive. Several banks co-operated and they fought a test case that eventually went to the Supreme Court (previously known as the House of Lords). Rather than fight the entire battle as to the issue of fairness of the actual terms, the initial skirmish looked to resolve whether the overdraft charges were excluded from an assessment of fairness. The issue was whether the charges were part of the price or remuneration and so should not be considered.

The High Court and Court of Appeal ruled that the terms were in plain, intelligible English, but  sided with the OFT on the fairness point. Now, in one of its first judgments since being formed, the Supreme Court has given its landmark judgment that affects millions of people. It has gone the other way and sided totally with the banks on this issue.

The Supreme Court said that the banks were correct in saying that the charges were part of the payment in exchange for a global package of services. The Court of Appeal had no basis for having said that some bits of the goods or services or price were ‘essential’ items and more important than others. Any monetary price or remuneration or goods or services provided would fall within the exemption. Banking services were part of a package of services and the price paid by consumers included the charges for going overdrawn. It is irrelevant that the charges are contingent or not incurred by the majority of customers. Even if some goods or services are ancillary to the overall banking service, if the charges for them are under the same contract then they are all part of the price for the purposes of the exemption.

The Supreme Court added that the OFT was wrong to argue that the admin charges were default charges – consumers were not in breach of contract by going overdrawn, but it was expected that they may go into overdraft from time to time and they would have to pay a charge for using that part of the service. Those charges were an important part of the banks’ revenue streams and were not intended to be seen as consumers defaulting on the contract.

As Lady Hale from the Supreme Court said, consumer law aims to give consumers informed choices rather than to protect them from making choices that may be unwise for them. Paul Gershlick, editor of www.Upload-IT.com and a Partner at Matthew Arnold & Baldwin LLP, says: ‘This is a great result for the banking sector and most banking customers – banks would otherwise have had to charge for their other services in other ways and a different result could have spelt the end of free retail banking. The judgment is also good, because there has been a lot of uncertainty in the business world about charging extra ‘admin’ costs. This ruling shows that as long as the charges are presented in a clear way with the contract terms, if they form part of the same overall contract for the goods or services, their amount cannot be challenged. The aim of the 1999 Regulations is to protect consumers from terms which they may not be aware of in the small print, but consumers should be taken to have given enough attention to what they have bought and what they are paying for that.’