|UK LENDING RULES – The OFT has published its Report on “Irresponsible Lending” to serve as a guidance for all creditors. Many aspects of the ECRC Responsible Credit principles feature in the guidelines.
|The European Coalition for Responsible Credit has been promoting events and sharing research and suggestions for more sustainable financial services and fair finance for a number of years. Conversations at seminars and exchange of views at our national and international stakeholder conferences help those interested in developing forms of best practice. Our 7 Principles of Responsible Credit are aimed at being a benchmark and it is very encouraging that these principles are increasingly being reflected in proposals and parliamentary discussions in the EU and overseas.
At first glance, the OFT's draft guidance appears very good for sustainable and responsible credit practices going forward. It also shows that the work of our coalition partners is making a difference and improving the quality of policy proposals. There are still areas where we would like to see more progress such as in bank innovation and engagement with stakeholders or in more resources being invested in empirical research on consumer difficulties, behaviours and outcomes…
The OFT guidance for creditors is attached below including a link to the OFT website and extracts from it. This guide for creditors should NOT be allowed to be changed too significantly by the UK lending industry over the next 13 weeks.
Debt On Our Doorstep today welcomed the draft guidance on responsible lending published by the OFT.
Presenting his initial reactions to the document, Damon Gibbons, Chairman of Debt On Our Doorstep, commented:
“This draft guidance is a huge step forwards for consumers. If implemented as currently drafted it would require lenders to make a proper assessment of a borrower’s ability to repay prior to granting a loan. We know that at the moment many lenders fail to make effective checks before lending, preferring to trap people in a cycle of increased borrowing. In the long term this has devastating consequences for low income households and communities.
“The OFT is to be applauded by putting forward such robust proposals to deal with this problem and we look forward to working with them over the coming 12 week consultation period.”
IRRESPONSIBLE LENDING – OFT GUIDANCE FOR CREDITORS
(An OFT consultation, July 2009)
The consultation closes on 21 October 2009.
PURPOSE OF THIS GUIDANCE
Amongst the reforms introduced by the Consumer Credit Act 2006, was the inclusion of new provision section 25 (2B) of the Consumer Credit Act 1974. This made clear that included amongst the business practices which the OFT may consider to be deceitful or oppressive or otherwise unfair or improper, for the purposes of considering fitness to hold a consumer credit licence ('the section 25 test'), are practices in the carrying on of a consumer credit business that appear to the OFT to involve irresponsible lending. The purpose in producing this guidance is to provide greater clarity for businesses and consumer representatives as to the business practices that the OFT considers constitute irresponsible lending practices.
Although the guidance is intended to cover business practices at each stage of the lending process that constitute 'irresponsible lending practices', it is not intended that it should cover all unfair practices (for the purposes of the section 25 test) that might occur at any stage in the process if, in the OFT's view, such practices do not constitute irresponsible lending practices.
The OFT has produced – and continues to produce – other guidance which gives our views on unfair practices more generally (for example OFT 969 Consumer Credit Licensing – General guidance for licensees and applicants on fitness and requirements). The OFT issued Non-Status Lending Guidelines in July 1997 (updated in November 1997) and has subsequently published guidance for businesses engaged in second charge lending, in July 2009, which now supersedes those Guidelines.
It is part of the OFT's regulatory approach to seek to educate consumers through the provision of appropriate consumer guidance1 and we will continue to address issues relating to 'irresponsible borrowing' in this context. However, in the OFT's view, the extent to which irresponsible borrowing is made possible in many (although not all) instances may, at least to some degree, be directly related to the effectiveness or otherwise of a creditor's business policies and procedures in respect of such matters as, for example, assessing affordability including ability to repay. This includes its procedures for considering the integrity of information supplied by potential borrowers which may, in part, inform such assessments.
There can be no doubt that too much credit has been provided to some borrowers, allowing for unsustainable levels of borrowing and contributing to consequential problem indebtedness.
The position that we are adopting in this guidance document seeks to balance the need to ensure that consumers are protected from irresponsible lending practices against the need to ensure that the supply of sustainable credit, particularly to those most in need, is not unduly inhibited. We are taking account of the current economic downturn and may revise our position on certain aspects of the guidance, in the future, in light of subsequent changes in the general economic climate.
SCOPE OF THE GUIDANCE
1.4 The OFT launched a consultation on the scope of its irresponsible lending guidance on 1 August 2008 and, on the basis of that consultation, determined that this guidance should cover each stage of the lending process from the pre-contractual stage of advertising and marketing through to a consideration of issues such as the handling of arrears and default.
THE GUIDANCE AND COMPLIANCE
1.7 This guidance document constitutes the OFT's view on business practices that involve irresponsible lending. It should be read in conjunction with other OFT guidance, including Consumer Credit Licensing – General guidance for licensees and applicants on fitness and requirements (OFT969), and Second charge lending – OFT guidance for brokers and lenders (OFT1105).
1.8 The guidance is not intended to be an exhaustive list of all possible behaviours which might constitute irresponsible lending. In a fast changing and developing market any such list would soon become out of date. Consequently, the guidance aims to cover the key principles and types of behaviour that are most relevant to a consideration of whether a creditor may be engaged in irresponsible lending, supplemented with some illustrative examples and explanation. The OFT expects all consumer credit businesses to fully comply with both the word and spirit of this guidance.
GENERAL PRINCIPLES OF LENDING
2.1 It is the OFT's view that there are a number of overarching principles of consumer protection and fair business practice which apply to all lending. There is, therefore, a responsibility on all creditors to ensure that their business practices and procedures are sufficient, and are given effect to in such a way, to ensure that the following principles are adhered to in practice. These principles should be considered as general statements on the conduct expected of creditors.
CREDITORS SHOULD EMPLOY THE USE OF APPROPRIATE BUSINESS PRACTICES AND PROCEDURES
2.2 The OFT would expect creditors to:
• fully consider the suitability of credit products based on the borrower's needs and taking account of his circumstances
• assess a prospective borrower's ability to meet repayments over the life of a loan in a sustainable manner, taking into account the impact of the loan on the borrower's overall financial well-being
• actively encourage borrowers to seek independent advice, signposting appropriate sources
• regularly monitor credit agreements and notify borrowers who are – or appear as if they may be – in difficulty, and
• take appropriate responsibility for any acts or omissions of brokers,12 debt recovery businesses (DRBs)13 and other intermediaries or agents who act on their behalf.
2.3 Creditors should not encourage borrowers to increase, aggregate or roll over existing debt when borrowers may face difficulties clearing their debts.
THERE SHOULD BE TRANSPARENCY IN DEALINGS BETWEEN CREDITORS AND BORROWERS
2.4 All information or documentation directed at – or provided to – borrowers should be clear, accurate and balanced, compliant with relevant legislative requirements, written in plain and intelligible language and should not be in any way misleading. (This would include, but not be limited to, all advertising and marketing materials, websites and pre- and post-contract information. This principle applies to documents and information provided throughout the credit cycle and regardless of whether it is directed at new potential borrowers or existing customers. The OFT would not consider that the requirement to employ the use of 'plain and intelligible language' would be met by documents or information that contain overly technical language, legal jargon, Latin phrases, unclear abbreviations or information that is unclear and/or incomprehensible to the average borrower.)
2.5 The OFT would expect creditors to:
• ensure warnings and caveats are given 'equal prominence' as to any benefits and or incentives, such that they are equally likely to be seen by the borrower and to have an impact
• provide early disclosure of key contract terms and conditions, including rates and charges
• ensure all contract terms and conditions15 are fair and clear so as to be easily understandable by the borrower and are not unfairly balanced16 in favour of the creditor, and
• provide explanations of key aspects of credit agreements which are adequate to enable the borrower to assess affordability and understand associated risks and his principal rights and obligations.
THERE SHOULD BE PROPORTIONALITY IN DEALINGS BETWEEN CREDITORS AND BORROWERS
• Borrowers should be treated with consideration and forebearance.
• Actions taken in respect of arrears or default should always be fair and proportionate and proper consideration should be given to all available options.
• Possession of a borrower's home should only be used as a last resort, having regard to the best interests and circumstances of the individual borrower.
CREDITORS SHOULD NOT TREAT BORROWERS UNFAIRLY
2.6 The OFT would expect creditors not to:
• target specific groups of borrowers with credit products that are likely to be inappropriate for members of such groups
• use high pressure selling techniques or inappropriate inducements
• use aggressive or oppressive behaviour or inappropriate coercion, or
• act in any way which is deceitful, oppressive, unfair or improper, whether unlawful or not.
3 EXPLANATIONS OF CREDIT PRODUCTS
3.1 There should be transparency in all dealings with potential and actual borrowers, with early disclosure of key contract terms and conditions (including rates and charges), and explanations of key aspects of credit agreements provided which are adequate to enable the borrower to assess whether he can afford the credit commitment and to understand the associated risks and his principal rights and obligations.
CLEAR AND UNDERSTANDABLE PRODUCT EXPLANATIONS
3.3 A creditor should proactively provide a borrower with a sufficiently clear and detailed explanation to enable the borrower to assess whether a proposed credit agreement is suited to his needs and financial circumstances. In particular, whether it is affordable having regard to the impact on the borrower's financial circumstances.
3.4 The explanation should be provided in good time, prior to the borrower entering into the credit agreement.
3.5 The OFT would not consider an explanation to be 'adequate' where the creditor had reasonable grounds to suspect that the borrower did not understand the explanation or material aspects of the explanation. The creditor should provide further explanation where he has reasonable grounds to suspect that the borrower does not understand a key aspect of the credit agreement and/or the pre-contract information.
3.7 Whilst explanations can be provided in a written pro-forma, this is unlikely in itself to be sufficient in all instances to enable the borrower to assess whether he can afford the credit commitment. Where and as appropriate, key features of the proposed credit product should be explained to the borrower in a PERSONALISED MANNER so that the borrower can understand the effects they may have on his financial circumstances.
3.8 There also needs to be an opportunity for a DEGREE OF 'INTERACTIVITY' between the borrower and the creditor such that the borrower is afforded the opportunity to ask questions and obtain clarification.
3.11 In the case of telephone or face-to-face transactions, even where a written pro-forma is provided, the following elements of the explanation must ADDITIONALLY be provided to the borrower ORALLY:
• any special or unusual features (if any) of the agreement or any features which carry a particular risk and the effect they might have on the borrower
• the consequences for the borrower arising from a failure to make payments under the agreement at the times required by the agreement
• the likelihood of legal proceedings or possession of the borrower's home in the event of a failure to keep up with repayments, and
• the borrower's ability to take away and consider the information which is required to be provided to him by the creditor before the borrower enters into the agreement.
3.14 An explanation should be given for each new agreement (including any modifying agreement) albeit in an abbreviated form where appropriate.
SPECIFIC IRRESPONSIBLE LENDING PRACTICES
Unsatisfactory business practices and procedures
Deceptive and/or unfair practices
ASSESSMENT OF AFFORDABILITY
4.1 Before granting credit or increasing the amount of credit, creditors should assess a prospective borrower's ability to meet repayments over the life of a loan in a sustainable manner. All such assessments of affordability29 should involve a consideration of the impact of the loan on the borrower's overall financial well-being. It is not sufficient to solely assess the likelihood of the borrower being to repay the loan in question – which would only constitute one aspect of such an assessment.
4.2 The OFT would regard 'in a sustainable manner' in this context as constituting:
• without undue difficulty
• within a reasonable period of time
• out of income and/or available savings, without having to realise security or assets30
• without incurring any/additional problem indebtedness.
4.4 All assessments of affordability should be based on the premise that the borrower should be able to repay the credit over the term. In the case of running account credit, where there is no fixed-term, the assessment should be based on an ability to repay an assumed drawdown (equivalent to the credit limit where there is one) over a reasonable period.
CONSTITUENT ELEMENTS OF AN ASSESSMENT OF AFFORDABILITY
4.7 The extent and scope of any assessment of affordability, in any particular circumstance, should be dependent upon – and proportionate to – a number of factors, including, but not necessarily limited to the following:
• The nature of the credit product.
• The amount of credit to be provided and the associated cost to the borrower.
• The borrower's financial situation.
• The borrower's credit history including any indications of the borrower having experienced existing or previous financial difficulty.
• The borrower's existing- and predictable future- financial commitments including any repayments due in respect of other credit products and the borrower's principal non-credit commitments.
• The impact of any reasonably foreseeable change in relevant circumstances on the borrower. This would include both changes to the borrower's own personal circumstances and, where appropriate, wider economic changes. A change in circumstances is unlikely to be considered to be 'reasonably foreseeable' unless it was known to be happening, or reasonably should have been anticipated, at the time that the assessment of affordability was undertaken. Relevant changes of circumstance would include a predictable end point of current employment due to circumstances such as retirement or the conclusion of a current employment contract with a specified finite time – either of which may lead to a fall in the borrower's disposable income.
• The vulnerability of the borrower. For example, whether the borrower has, or appears as if he may have, mental health problems which could impact on his capacity to be able to understand information and explanations and make informed decisions based on his understanding of such information and explanations.
• The borrower's actual or apparent financial capability.
4.8 Creditors may employ the use of a variety of types and sources of information to assess affordability. Such information might appropriately include some or all of the following (this is a non-exhaustive list):
• evidence of income
• evidence of expenditure
• a credit score
• a credit report from a credit reference agency
• information obtained from the borrower, whether on the application form or separately
4.9 In some instances, the creditor's standard assessment of creditworthiness may be sufficient to also assess the issue of affordability whilst in other instances it is unlikely that this will be the case. Whatever means and sources of information creditors employ to assess affordability should be sufficient to make an assessment of the likely impact of the loan on the borrower's overall financial well-being.
4.11 In taking expenditure into account in assessing affordability, such considerations should take into account not only regular household expenditure and relatively fixed outgoings (monthly rental payments for example) but also the varying nature of certain items of expenditure over the anticipated repayment period (for example utilities bills). The assessment should not be based on a presumption that the most recent payment necessarily represents 'the norm' for the entire term of the loan.
4.12 Creditors who do not require documentary evidence of income and/or expenditure as part of their assessment of affordability, but rather accept the information communicated by the borrower in the absence of any supporting evidence or, in the alternative, do not seek any information on income and/or expenditure as part of their assessment, must ensure that whatever other means and sources of information they employ are sufficient to make a proper assessment. Self-certification of income would not generally be considered adequate in respect of large long term loans, particularly those secured on property.
4.15 A high level of scrutiny should normally be undertaken in the case of secured loans whereby homeowners with a first mortgage access further borrowing secured by a subsequent charge on their property. This should also be the case where unsecured debt is consolidated into a secured loan.
SPECIFIC IRRESPONSIBLE LENDING PRACTICES
Unsatisfactory business practices and procedures
Deceptive and/or unfair practices
5 PRE-CONTRACTUAL ISSUES
UNSATISFACTORY BUSINESS PRACTICES AND PROCEDURES
5.1 Employing the use of advertising or other promotional material which suggests, either expressly or by implication, that loans are available regardless of the borrower's financial circumstances. For example, adverts stating that credit is 'guaranteed' or 'pre-approved' or can be provided without any credit checks being undertaken.
5.2 Employing the use of advertising or other promotional material offering credit with pre-completed amounts of credit which either is not conditional on any associated affordability assessment or without making clear that it is conditional on such an assessment.
5.3 Employing the use of advertising or other promotional material which suggests, either expressly or by implication, that loans are dependent only upon the value of equity in the property on which the loan is to be secured.
5.4 Failing to act in the best interests of a borrower by promoting the sale of a particular credit product under circumstances in which the creditor suspects, or ought to suspect, that the product is clearly inappropriate given the borrower's needs and personal circumstances. For example, advising a borrower to take out a secured loan, or to replace or convert an unsecured loan to a secured loan, when it is clearly not in the borrower's best interests to do so.
5.10 Employing the use of advertising or other promotional material in which details of risks to the borrower are not given at least the same prominence as incentives.
5.11 Employing the use of advertising or other promotional material which understates or masks the potential risks to the borrower.
This would include advertising that 'trivialises' the decision to borrow.
5.12 Encouraging, inducing or incentivising a borrower to sign up to an agreement quickly. For example, pressurising a borrower to enter into a loan immediately, without the opportunity for proper consideration, through inappropriate use of incentives or 'special' offers.
DECEPTIVE AND/OR UNFAIR PRACTICES
5.14 Employing the use of advertising or other promotional material which either presents or omits key information relevant to a borrowing decision such as to actually or potentially create a false or misleading impression to the borrower.
5.15 Failing to act in the best interests of a borrower by promoting the sale of a particular product, for business and/or personal gain, under circumstances in which the product is clearly inappropriate given the borrower's needs and personal circumstances.
6 POST-CONTRACTUAL ISSUES
Unsatisfactory business practices and procedures
6.1 Failing to proactively, regularly and effectively, monitor a borrower's repayment record. The OFT considers that creditors should take appropriate action, including alerting the borrower to the risk of an escalating debt, when/if there are signs of apparent repayment difficulties.
6.2 Setting the minimum repayment on a running account credit agreement at a level that would not repay capital, as well as interest, within a reasonable period.
6.3 Requiring a borrower to make a specified number of transactions or spend a specified amount under a credit agreement in order to qualify for/retain a preferential interest rate or lower charges.
6.4 Failing to provide borrowers with clear information on their rights under the agreement, including how to complain if things go wrong.
6.5 Failing to keep the borrower adequately informed of the state of his account via the provision of regular statements (in accordance with the requirements of section 77A or 78(4) of the Act).
6.7 Failing to proactively provide borrowers with adequate notice, in the form of clear, written, information, regarding any variations in the terms and conditions of the agreement which may adversely impact on the borrower, sufficiently prior to any such variations coming into effect. This includes compliance with section 82 of the Act and the relevant regulations as applicable. The OFT considers that this would extend to increases in interest rates and charges, unless these are linked to an external reference rate (which is publicly available) and the parties have agreed expressly in the contract that prior notification is not required (in which case this must be explained clearly to the borrower at the pre-contract stage).
It would also include notifying a borrower that a preferential rate on a finance deal is about to end in order to provide him with sufficient opportunity to settle the outstanding debt. The OFT would consider 'sufficiently prior' to constitute sufficient time for the borrower to take any necessary remedial action as a consequence of the proposed variation including withdrawing from the agreement prior to the variation coming into effect. For example, under the Statement of Fair Principles established at the 'Credit Card Summit' in December 2008, relevant creditors agreed not to increase interest rates without giving the borrower at least 30 days notice and to give borrowers the option of closing their accounts and paying off the debt at the existing interest rate in the event of an increase.
6.8 Raising a borrower's credit limit without notifying the borrower and/or without the borrower's consent.
6.9 Allocating payments to the least expensive debt first (or otherwise than to the oldest or most expensive debt first) under circumstances in which it was not explained to the borrower, clearly and fully, in plain and intelligible language, in advance of him entering into the credit agreement, that this would be the case.
6.10 Supplying credit card cheques to a borrower who has advised that he does not wish to receive them. The existence of the right to 'opt out' should be drawn clearly and prominently to the borrower's attention at the outset of the agreement and with each provision of credit card cheques.
DECEPTIVE AND/OR UNFAIR PRACTICES
6.13 Varying interest rates where there is no objective basis for doing so. For example, variable rates should not be misused to take advantage of a borrower's lack of ability to end the agreement or the restrictions on him doing so such as redemption charges.
Objective reasons would include:
h the recovery of genuine increased costs in lender funding, or
h a quantifiable change in the risk presented by a borrower such as to justify a change in the interest rate.
In the OFT's view, it would be disproportionate to increase the interest rate applied to a borrower solely on the basis that the borrower had missed a single repayment or had failed to pay in full on more than one occasion.
6.14 Setting settlement charges43 at a level that is unfair and/or unreasonable, and which is not reflective of the credit provider's reasonable costs on early settlement.
6.15 Refinancing a borrower's existing credit arrangements, without the borrower's request or consent to do so, and where it is clearly against the best interests of the borrower to do so.
6.16 Repeatedly refinancing (or 'rolling over') a borrower's existing credit commitment for a short-term loan product. The OFT considers that this would include a creditor allowing a borrower to sequentially enter into a number of separate agreements for short-term loan products, one after another, where the overall effect is to increase the borrower's indebtedness. The general purpose of short-term loans, such as 'Payday loans', is to provide borrowers with a cash advance until their next pay day and they are usually about 30 days, or just over, in duration. However, in certain circumstances, the borrower can elect to 'renew' the loan for a fee and delay payment for a further agreed period of time. The purpose of payday loans is to act as a short-term solution to temporary cash flow problems experienced by consumers. They are not appropriate for supporting sustained borrowing over longer periods, for which other products are likely to be more suitable.
6.17 Failing to lower a borrower's credit limit following receipt of a specific request from the borrower to do so.
6.18 Providing a borrower with a new or additional credit facility following receipt of a specific request from the borrower not to do so. This would include failing to remove any such facility following receipt of a specific request from the borrower to do so.
6.19 Failing to allow the borrower to repay part of the capital under a credit agreement at any time, upon reasonable notice. Any charges applied on such partial early repayment should be fair and reasonable and cost reflective.
7 HANDLING OF DEFAULT AND ARREARS
UNSATISFACTORY BUSINESS PRACTICES AND PROCEDURES
7.1 Failing to establish and implement clear, effective, and appropriate, policies and procedures for dealing with borrowers whose accounts fall into arrears. These policies and procedures should make specific provision for, amongst other matters, the fair and appropriate treatment of VULNERABLE BORROWERS such as those with mental health problems.
7.3 Failing to treat borrowers in default or arrears difficulties with forbearance. For example, under the Statement of Fair Principles established at the 'Credit Card Summit' in December 2008, relevant creditors agreed not to increase interest rates for borrowers who have fallen behind on payments and/or those who are in serious discussion with a debt advice agency regarding a debt repayment plan. The OFT would expect creditors to consider suspension of any further interest and charges and/or allow for deferment of payment of arrears under circumstances in which the imposition of any such further charges and/or increase in interest, or requirement for immediate payment of arrears, may either extend the borrower's repayments to an unmanageable level, or necessitate a substantive increase in the repayment period.
7.4 Failing to inform the borrower when he has gone into arrears (as defined in sections 86B or 86C of the Act).
7.6 Failing to inform the borrower, without delay or at all, of the imposition of any default sum, or any increase, reduction or suspension of interest or charges.
7.7 Failing to provide adequate notice to a borrower that the responsibility for recovery of a debt and/or the legal right to recover a debt has been transferred or assigned to a named third party debt recovery business. Such notification should be provided at the point in time when the true debtor's location has been established.
7.8 Instituting court proceedings in the absence of having given the borrower appropriate notice of the intention to initiate proceedings, or having provided clear information regarding the grounds for the proceedings.
7.9 Making undue, excessive or inappropriate use of statutory demands when a borrower falls into arrears.
7.10 Failing to suspend the pursuit of recovery of a debt from a borrower in default or arrears difficulties under circumstances in which the borrower disputes the debt and has, or may have, reasonable grounds for doing so.
7.11 Failing to suspend the active pursuit of recovery of a debt from a borrower in default or arrears difficulties under circumstances in which an accredited non profit-seeking debt advisor is assisting the borrower in agreeing a repayment plan.
7.12 Failing to suspend the pursuit of recovery of a debt from a borrower, under circumstances in which notification has been given, and/or it is apparent, that the borrower has a mental health problem, unless or until a reasonable period of time has been allowed for relevant evidence to be provided as to the likely impact of the mental health problem on the borrower's ability to manage his debt and deal with a debt recovery business.
7.13 Taking steps to possess the borrower's property, other than as a last resort. The OFT would not expect a creditor to take any form of disproportionate action against borrowers in respect of arrears or default. This would include such matters as applying to the court for a charging order to be placed on the borrower's property or for an order for sale or for the borrower to be made bankrupt, without having fully and properly explored other alternative, more proportionate options for recouping arrears. Some borrowers may be unaware of the option of being able to apply to court for a 'time order'. The OFT would expect creditors to make borrowers aware of this option when and if appropriate to do so. The OFT would expect all other possible options for dealing with the problem to be explored prior to resorting to taking steps to possess the borrower's property and for proper consideration to be given to any reasonable offer by the borrower to pay by instalments.
DECEPTIVE AND/OR UNFAIR PRACTICES
7.14 Imposing unreasonable charges on borrowers in default or arrears. In the OFT's view, any default or other charges should be limited to what is reasonable, doing no more than covering the creditor's necessary administrative costs and they should not constitute 'penalties'. Charges and interest imposed would be considered unreasonable if they were not proportionate to the debt to which they relate.
7.15 Failing to allow for alternative, affordable, payment amounts when a reasonable proposal is made by the borrower or his appointed debt advisor or representative.
7.17 Insisting that all arrears are paid in one payment, or in unduly large amounts, and/or within an unreasonably short period.
8 REGULATORY COMPLIANCE AND ENFORCEMENT
THE 'SECTION 25 TEST'
8.1 Section 25 of the Consumer Credit Act 1974 (the Act) provides that, in considering fitness to hold a consumer credit licence, the OFT takes into account any circumstances which appear to it to be relevant and in particular any evidence tending to show that an applicant, licensee, or its employees, agents or associates, past or present, have:
• committed offences involving fraud or other dishonesty or violence
• failed to comply with the Act or any other enactment regulating the provision of credit to individuals or other consumer protection legislation
• failed to comply with the requirements of Part 16 of the Financial Services and Markets Act 2000 so far as they relate to the consumer credit jurisdiction operated by the Financial Ombudsman Service
• practiced discrimination in connection with the carrying on of their business
• engaged in business practices appearing to the OFT to be deceitful, oppressive or otherwise unfair or improper, whether unlawful or not.
8.2 The Act also requires that in determining whether a person is fit to hold a licence to operate a consumer credit business, the OFT shall have regard to the skills, knowledge and experience in relation to consumer credit businesses of that person and other persons who will participate in any business carried on by him under a licence and any practices and procedures to be implemented in connection with any such business.
EVIDENCE OF COMPLIANCE
8.5 The OFT expects creditors to take all reasonable steps to ensure that they have suitable business practices and procedures in place to ensure compliance (for example through training, auditing, disciplinary policies/procedures, or any other means necessary and appropriate to the business), implementing any changes as necessary.
8.6 If the OFT requires them to do so, it will be incumbent on creditors to be able to positively demonstrate to the OFT's satisfaction that their polices and procedures:
• ensure appropriate explanations of credit products are provided to actual and potential borrowers and that they are adequate to enable the borrower to assess whether he can afford the credit commitment
• are appropriate to assess a prospective borrower's ability to be able to afford to meet repayments over the life of a loan in a sustainable manner
• deal appropriately with borrowers whose accounts have fallen into arrears
• have been implemented in practice and are effective
• are proactively monitored to assess their ongoing effectiveness
• have been appropriately amended on the basis of the results of such monitoring as and when appropriate to do so.
8.7 These policies and procedures should be documented and capable of being made available for inspection by the OFT and/or the relevant local authority Trading Standards Service. They should contain sufficient detail (a document outlining the business' policies and procedures for assessing affordability, for example, which simply stated that 'appropriate means are employed to assess affordability and ability to repay', or words of similar effect, would not be considered to contain sufficient detail in the absence of more information on the specific means employed) in respect of the actual procedures employed to allow the OFT to be able to form a view as to whether the procedures appear appropriate.
8.14 Alternatively, we may consider it appropriate to impose specific 'requirements' on a trader where we are dissatisfied with certain aspects of conduct or that of any associates. Failure to comply with a Consumer Credit Act section 33A requirement can lead to the imposition of a financial penalty of up to £50,000 per instance. We may also compulsorily vary a licence, for instance to limit the activities for which a trader is licensed, or limit the life of the licence.
8.15 In cases of serious misconduct and/or where there are concerns about integrity, and the OFT has evidence tending to show that a person is unfit to hold a consumer credit licence, it can take action with a view to refusing or revoking the credit licence of the person concerned. Engaging in irresponsible lending practices would constitute grounds for the OFT to consider fitness to hold a licence.
Below a summary of the questions
Chapter 1 Introduction
A.1 Does the introductory chapter set out the OFT's general view on the scope of what might constitute irresponsible lending practices, and the legal test for irresponsible lending, sufficiently clearly?
A.2 Are there any substantive aspects with which you disagree?
A.3 Do you consider that there are any significant omissions?
A.4 Do you have any other suggestions for improvement?
Chapter 2 General principles of lending
A.5 Are the draft guidelines on the general principles of lending sufficiently clear?
A.6 Are there any substantive aspects with which you disagree?
A.7 Are there any significant omissions?
A.8 Do you have any other suggestions for improvement to this section?
Chapter 3 Explanations of credit products
A.9 Are these draft guidelines on explanations of credit products sufficiently clear?
A.10 Are there any substantive aspects of the draft guidelines on explanations of credit products with which you disagree?
A.11 Are there any significant omissions?
A.12 Do you have any other suggestions for improvement to this section?
A.13 Where applicable, should borrowers be able to access telephone 'help-lines' free of charge?
A.14 Where applicable, should creditors be required to provide access to telephone 'help-lines' at point of sale?
A.15 Where a borrower has entered into a long-term credit agreement, should the creditor by required to repeat aspects of the explanation of the credit product during the term of the agreement and, if so, how frequently?
Chapter 4 Assessment of affordability
A.16 Are these draft guidelines on assessment of affordability issues sufficiently clear?
A.17 Are there any substantive aspects of the draft guidelines on assessment of affordability issues with which you disagree?
A.18 Are there any significant omissions?
A.19 Do you have any other suggestions for improvement to this section?
Chapter 5 Pre-contractual issues
A.20 Are the draft guidelines on pre-contractual issues sufficiently clear?
A.21 Are there any substantive aspects of the draft guidelines on pre-contractual issues with which you disagree?
A.22 Are there any significant omissions?
A.23 Do you have any other suggestions for improvement to this section?
Chapter 6 Post-contractual issues
A.24 Are these draft guidelines on post-contractual issues sufficiently clear?
A.25 Are there any substantive aspects of the draft guidelines on post-contractual issues with which you disagree?
A.26 Are there any significant omissions?
A.27 Do you have any other suggestions for improvement to this section?
Chapter 7 Handling of default and arrears
A.28 Are these draft guidelines on the handling of default and arrears sufficiently clear?
A.29 Are there any substantive aspects of the draft guidelines on the handling of default and arrears with which you disagree?
A.30 Are there any significant omissions?
A.31 Do you have any other suggestions for improvement to this section?
A.32 Should a debt recovery business delay pursuance of a debt from a borrower lacking the capacity to make decisions relevant to the debt recovery process, unless the borrower has someone managing his affairs pursuant to a Lasting Power of Attorney or an order of the Court of Protection?
Chapter 8 Regulatory compliance and enforcement
A.33 Are these draft guidelines on regulatory compliance and enforcement sufficiently clear?
A.34 Are there any substantive aspects of the draft guidelines on regulatory compliance and enforcement with which you disagree?
A.35 Are there any significant omissions?
A.36 Do you have any other suggestions for improvement to this section?
Created: 03/08/09. Last changed: 04/08/09.
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