This article was first published in the February 2011 UK edition of Accounting and Business magazine
The Consumer Credit Directive was adopted by the European Council in May 2008 and, from 1 February 2011, revised rules apply when advertising and arranging consumer credit.
The main changes are as follows:
If an advertisement includes an interest rate or any amount relating to the cost of credit, it must also include a representative example. This must contain certain standard information including a representative APR.
2. Credit checks
The borrower’s creditworthiness must be assessed before granting credit or significantly increasing the amount of credit. The assessment must be based on sufficient information obtained from the borrower and a credit reference agency as appropriate.
The borrower must be given an adequate explanation of the proposed credit agreement (eg the particular features of the agreement and the consequences of failure to make payments).
3. Pre-contractual information and agreements
The Disclosure Regulations require pre-contractual information to be given in good time before the borrower enters into the agreement. 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 or she wishes. In most cases, the information must be provided in a standard format – the pre-contract credit information form, to aid comparability and consumer understanding.
In the case of overdrafts, a different standard form may be used, but is not mandatory. If this form is not used, all the information must be equally prominent.
There is a new right for consumers to request a statement of account for a fixed-term loan. The statement can be requested at any time during the life of the agreement, but not more frequently than once a month.
4. Right of withdrawal
The borrower can withdraw from an agreement within 14 days following conclusion of the agreement, or once the borrower has received a copy of the executed agreement or notification of the credit limit on a credit card. The borrower must repay the credit and must also pay interest for each day the credit was drawn down.
5. Interest rate changes
The borrower must be notified of changes in the rate of interest payable under the agreement. This must generally be done in writing before the change takes effect.
6. Borrower redress
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.
7. Early settlement
The existing right to settle a credit agreement early is extended to a right to make partial early settlements at any time. Under section 95A of the Consumer Credit Act, the creditor may claim compensation in certain circumstances provided that this is fair and objectively justified and does not exceed 1% or 0.5% of the amount repaid early.
8. Termination of open-end agreement
The borrower can cancel an open-end agreement at any time, subject to notice not exceeding one month. The creditor must give at least two months’ notice of termination, and the notice must give objectively justified reasons.
9. Debt transfer
The borrower must be told if the debt is sold or transferred to a third party, unless the arrangements for servicing the debt are unchanged.
A number of changes have been made in the requirements on overdrafts. These largely relate to the information that the creditor must give to the borrower, about both authorised overdrafts and overdrafts which are not pre-arranged.
Credit intermediaries must disclose the extent to which they are acting independently or working exclusively with one or more creditors. If a fee is payable by the borrower to the credit intermediary for his services, this must be agreed in writing with the borrower before the credit agreement is entered into. The fee must be notified to the creditor if the creditor is calculating the APR.
12. Failed credit checks
If an application for credit is declined on the basis of information from a credit reference agency, the creditor must notify the borrower of this and provide contact details of the credit reference agency.
Glenn Collins, head of advisory, ACCA UK