A timely warning
credit where credit is due

As new legislation takes effect, businesses providing credit to consumers will need to take a very close look at the small print to ensure compliance.

From 1 February 2011, various provisions of the Consumer Credit Act 1974 will be amended as part of the implementation of the 2008 Consumer Credit Directive.

The amendments will affect all consumer credit agreements regulated under the Act and are designed to help the debtor, by obliging the creditor to further clarify the terms, and implications of the agreements. Also, while the provisions will apply to some aspects of business lending (up to £25,000), the provisions will largely affect non-business lending that is not secured on land. It is worth familiarising yourself with these provisions because if the relevant agreement does not comply with all relevant legislation it may only be enforceable with an order of court, or not enforceable at all.

The creditor is now obliged to assess the creditworthiness of the debtor prior to granting, or increasing, credit, either through information collected from the debtor or from a Credit Reference Agency (CRA). If an application for credit is declined then a full explanation, including any CRA information, must be provided to the debtor.

Any agreement has to be made in writing, must contain specified information, and be clear, concise and legible. The precise information required will vary depending on the type of agreement.

A copy of the final agreement must be given to the debtor, in accordance with the time limits in the Act. If this provision is not complied with, the agreement cannot be enforced against the borrower without a court order.

Additionally, for non business agreements, there are strict provisions relating to the pre-contractual information, which must be provided in good time, prior to the debtor entering into the agreement. This includes, but is not limited to, the type of credit; the identity and address of the bank; the total amount of credit; the duration of the agreement; and the rate of interest charged. It will also have to be provided in a standard format to ease comparison by the debtor with other competing products.

The debtor can withdraw from an agreement within 14 days following conclusion of the agreement or (if later) once the debtor has received a copy of the executed agreement or notification of the credit limit on a credit card. In the event of withdrawal, the debtor must repay the credit and the interest for each day the credit was taken.

Assuming the debtor has committed to the agreement, then there are various provisions that apply during the term of the agreement. The creditor must give the debtor information on changes to the rate of interest when it increases; and the debtor can request a statement of account for a fixed-term loan at any time, but not more frequently than once a month. Also, the existing right to settle a credit agreement early is extended to a right to make partial early settlements at any time, although the Act does provide for the creditor claiming compensation for this in certain circumstances.

It is essential that businesses involved in this area fully review both their credit documentation and business practices to ensure they comply with the new requirements. If the Act is not complied with, the agreement may not be able to be enforced against the debtor. As this area of law is very particular to the type of agreement, and consumer, involved, these comments are very general, and will not apply to all circumstances.

Semple Fraser LLP is a leading commercial law specialist, offering advice of the highest quality across a range of areas. With lawyers qualified in both Scots and English law and offices in Glasgow, Edinburgh and Manchester, we are able to deliver a full banking service throughout the UK. The Banking & Finance Group of Semple Fraser LLP has expertise in all areas of banking and property finance, and works closely with the other specialist areas of the firm to provide the complete service to clients.

For more information on these topics, please go to www.semplefraser.co.uk, or contact Alex Innes on 0131 273 3771 or alex.innes@semplefraser.co.uk

Alex Innes is Head of the Banking & Finance Group of Semple Fraser LLP.

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