The Consumer Credit Act 1974



Which agreements are regulated by the Consumer Credit Act?

The Consumer Credit Act 1974 regulates loan agreements where the borrower is an individual (i.e. not, for example, a limited company). It also applies where the borrower is a partnership of up to three partners (but not to larger partnerships) and to unincorporated associations of any size.

 
The Act also covers most hire-purchase agreements.

 
Most consumer credit agreements (and some business loans) are therefore regulated by the Act though some types of agreement are exempt under the Act. Some grounds for exemption have changed since the Act was first introduced. Currently a new agreement is exempt if, for example, the sum of money loaned is less than £50, where the loan is offered to a particular class of individuals rather than the public generally and the interest rate does not exceed prescribed limits, and where  the borrower borrows the money for a business purpose and the amount borrowed is over  £25,000. But in the past the rules have been different so that, for example, for loan agreements made between 1st May 1998 and 6th April 2008, all agreements for over £25,000 (not just business agreements over £25,000) were exempt. Between 20th May 1985 and 1st May 1998 all agreements over £15,000 were exempt, and before 20th May 1985 all agreements over £5,000 were exempt.  

“Charge” cards (where the entire credit must be paid in one instalment) are generally exempt, as is credit of a fixed amount which has to be repaid within 12 months in not more than four instalments. 

However even "exempt" agreement can be subject to the general "unfair relationships" provisions (see below).   

   

The severe mandatory sanctions on lenders under older agreements   

As originally enacted and before the 2006 Act came fully into force, some of the provisions of the Consumer Credit Act 1974 were particularly severe on lenders, making the loan agreement completely unenforceable if certain documentation was not exactly correct. This meant that a technical breach of the Consumer Credit Act 1974 could, in some circumstances, mean that the borrower received the windfall of being completely free from having to repay the loan. In this respect the Consumer Credit Act 1974 followed the approach of the earlier Moneylenders Act 1927 which it replaced. It is an indication of the severity of these provisions that the Court of Appeal, in 2000, held that certain provisions of the Act were incompatible with the human rights of lenders. However the House of Lords overturned that decision and held that Parliament was entitled to adopt these severe measures in order to regulate the money-lending market even though in individual cases they were harsh from the lender’s point of view.


The discretionary unfair relationships provisions 

The Consumer Credit Act 2006 made significant amendments to the Consumer Credit Act 1974, in particular by inserting sections 140A to 140C known as the “unfair relationships provisions”. These provisions allow the court to look at the entire relationship between lender and borrower including anything done by the lender “either before or after the making of the agreement or any related agreement” which would include, for example, any payment protection insurance sold by the lender to the borrower. If the court decides that the relationship is “unfair” then the court has wide discretionary powers to discharge the loan or reduce the amount owing under it by any amount which the court considers appropriate. The court can also order the lender to make a payment to the borrower (for example refunding the premium charged for a mis-sold payment protection policy).

The wide scope of the "unfair relationships provisions" is illustrated by cases such as Harrison v Link Financial where the Mercantile Court discharged the outstanding debt because of the debt collection agency's behaviour in hounding the debtor with "non-traceable telephone calls", and Bank of Scotland v Singh a commercial loan case where the Mercantile Court ordered the bank to remove receivers and make the loan interest free during the 3 year period that the receivers had been unfairly appointed by the bank.

The wide scope of the unfair relationships provisions - applying even to some exempt agreements

The unfair relationship provisions apply to most loan agreements where the borrower is an individual, both consumer loans and business loans, including many agreements which are otherwise "exempt" under the Consumer Credit Act 1974.

The introduction of these flexible discretionary “unfair relationships provisions” meant that some of the harsh all-or-nothing provisions were no longer needed and these were repealed at the same time. However the repeal was not retrospective so that for loan agreements made before 6th April 2007 the borrower still has the possibility of a windfall if there are certain technical defects in the wording of the agreement (as well as the possibility of relying on the new “unfair relationships provisions”).  


The requirement for a Default Notice 

Most loan agreements will have clauses providing that the entire amount outstanding becomes immediately repayable if the borrower misses an installment (or perhaps two consecutive installments). However, even if this is so, the Consumer Credit Act 1974 requires the borrower to serve a “Default Notice” before the lender is entitled to terminate an agreement or demand early repayment of the entire loan. If the Default Notice does not meet all of the strict detailed requirements imposed by the Consumer Credit Act 1974 and associated Regulations,  it is completely invalid.

Disclaimer

The above explanation of the law is only an overview and in order to be reasonably concise I have had to leave some details out - details which are likely to affect what the law would say about your own situation. So please do not rely on the above but contact me for advice 

This page was lasted updated in October 2016          Disclaimer