Question to Bruce Wood: What
are the key pieces of legislation that are affecting the motor
industry that you think people should be aware of?
Bruce Wood: The
current government and the next government are keenly interested in
consumer protection. There’s a huge amount of legislation in the
pipeline that will hit the motor finance industry.
Go deeper with GlobalData
Clearly the most significant thing is the
implementation from June next year in the UK of the Consumer Credit
Directive. Linked to that is the OFT consultation on irresponsible
lending. There is an EU consultation which is slightly behind the
OFT on irresponsible lending.
Then there is the over-indebtedness taskforce
from the OFT. All of these things are driving in a similar
direction.
From the industry’s point of view, what’s
important is not just the implementation of the Directive, but its
interlinking with the guidance coming from the OFT on irresponsible
lending.
Although the OFT’s guidelines on irresponsible
lending do not have the force of law, the OFT thinks – and more
importantly acts – as if they do, with the threat of taking away
consumer credit licences from non-compliant firms. There is a real
risk that UK providers are going to be at a disadvantage
Europe-wide, because all the signs are that the combination of the
government and the OFT will gold-plate implementation in the UK of
the Directive.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataA few salient points. The regulations
implementing the Consumer Credit Directive will be published in
final form at the end of October, to be passed by parliament to
come into force in June 2010.
As everybody has been telling the EU and the
OFT, this is a very short time scale compared with what has to be
done. The draft CCD regulations are being circulated at the moment
and there is a lot wrong with them. We have until November to get
them right.
The first point is early repayment. From June
next year, customers are going to be able to make partial repayment
and they will be able to do so as often as they like. And if they
do, you have to adjust the future payments under the agreement.
Rebate on early settlement provisions will also kick in.
How do we distinguish between someone who has
just made an overpayment and someone who is making an early
repayment? We don’t know yet.
There is even a suggestion that early
repayments could be made by oral notice and not just written
notice. There is an interesting and very specific quirk for this
group in that at the moment, if someone makes a partial repayment –
say, if they pay 10 percent of the outstandings – the draft
legislation provides that all linked payments will also reduce by
10 percent. So that would ludicrously mean a reduction by ten
percent in maintenance obligations.
There is some good news in here: the
documentation is going to be easier, although motor financiers are
going to have to change all their documentation. All the problems
with cancellation, cancellation notices, and multiple copies of
documents will go away – there is going to be a standard 14-day
right of withdrawal for all these agreements, just as there is for
distance marketing, and there is only a requirement to supply one
copy of the agreement.
On the other hand we have got used to
pre-contract information which has to be seen by the debtor before
he signs the agreement. That will be replaced by a Standard
European Consumer Credit Information sheet [a SECCI]. Two problems
with a SECCI – first, it’s not in plain English, and secondly, from
a systems point of view, it’s not just a copy of an agreement, it’s
a document in itself. You’ll have to have done them by next year
for all your different products.
The very good piece of news, meanwhile, is the
possibility that the FLA is working on – that voluntary
terminations [VTs] may be inconsistent with the directive. The FLA
is getting senior counsel’s opinion on this. My personal view is
that VTs are inconsistent with the Directive. It will be a long
struggle to convince the government that this should be the case,
however. The remedy may be a test case to show that this is
incompatible with the legislation, if counsel’s opinion gives any
encouragement in this direction.
The single most significant issue though is
the need under the Directive to give adequate explanations at the
point of sale in respect of the products. Not only, therefore, are
you going to have to devise a SECCI for all your products, but
you’re also going to have to devise adequate explanations for your
products that customers can understand.
Specifically, the draft new clauses to the
consumer credit act are that you have to give the customer an
opportunity to ask questions about the agreement, and that some of
the provisions have to be discussed orally.
Now the example we’ve been throwing about is
that of the furniture store on a busy Saturday afternoon when the
sales assistants are all run off their feet, but for this audience
this equally applies to the weekend motor showroom. Who is going to
give these explanations? Does it have it be a 24-hour, 7 days week
telephone helpline?
We don’t know what the truth of this is yet,
but if you look at the OFT guidance and response, some of it is
quite alarming.
So you are going to have to devise robust
methodologies with your motor dealers about how they present these
products when they are dealing at the point of sale, and it is
undoubtedly going to make point of sale more difficult.
Another thought. Take a PCP agreement, take a
credit sale agreement with an ECO scheme with all the options that
kick in at the expiry of the fixed period. How on earth do you
explain that to customers? If you have an intellectually challenged
employee dealing with an ECO scheme, how do you explain to him what
happens at the end of the contract?
At present it is impossible to offer variable
rate hire purchase [HP] under the act, but nobody ever meant for
this to be the case; it was an accident of drafting in a Schedule
to the Agreements Regulations. I think it will be possible under
the Directive to do variable-rate HP and potentially to open up a
marketplace for that – this is something we need to look at
carefully when the new draft Regulations are finalised to see if
this product will now be possible.
The Directive relates to consumer credit, not
consumer hire, and just as some of the unpleasantnesses of the 2006
Act don’t apply to personal contract hire – they do apply to
personal contract purchase, for example – it may make PCH a much
more attractive option.
The irony with the Consumer Credit Directive
is that, if we didn’t have the Consumer Credit Act, the Directive
would actually make quite a lot of sense. But trying to gel the two
together is causing an awful lot of tangles.
Jim Rowley: Is
there any move by the OFT to require lenders to get any
verification of income when writing a credit agreement?
Bruce Wood: The
responsible lending guidance doesn’t quite go that far. It says
it’s not sufficient to solely assess the likelihood of the borrower
being able to repay the loan in question.
What you have to do is assess the prospective
borrower’s ability to repay over the life of the loan in a
sustainable manner – meaning without undue difficulties out of
income and available savings and assets.
Everybody’s worried. Are you supposed to ask
invasive questions which potentially you are not entitled to ask?
There is an onus on the customer but there’s very little emphasis
on that in the OFT. Big companies should be lobbying furiously
about this. The FLA is doing a very good job on it.
What the OFT doesn’t grasp is that people who
really want finance will often not tell the truth. It is very much
hoped, and it looks as if this is going to be the case, that if you
haven’t given adequate explanations and this can be proved (and how
anyone proves that you have or have not is an interesting question
in itself), then the sanction is not going to be unenforceability
of the agreement, but will instead be a look at your licence.
James Snow: I do
not believe it will become regulatory law, but each salesman is
going to need prompting on the right questions and what to ask.
What’s happened in the mortgage market for example is that you now
have a 15 to 18 page key facts document to go through and provide
for every enquiry and application. It is very challenging and time
consuming for the intermediaries and lenders.
Bruce Wood: I don’t
think it is going to be quite that bad because I think what you’re
all going to be doing is providing written, adequate explanations
of what the agreement is going to be about, which is supposed to be
in plain English anyway.
So clearly it is going to have to be short and
punchy, covering the special features of the agreement, the cost of
the agreement, all the things you would expect.
But when you come to the actual format itself,
you know that under the 2005 regulations, you’ve got to have key
financial information, and you’ve got to set out separately the
hire purchase funding, the PPI funding forms, GAP funding and any
other funding.
We’re not quite there with this yet, but none
of that sort of distinction is made in the Directive. So the
Agreements Regulations which we have at the moment set out 24
things you’ve got to have in your consumer credit agreement. In the
new Regulations there is still a list of things, but a lot of them
are much simpler than what we currently have because they don’t
distinguish by category of agreement different things which have to
be said.
One of the problem issues is looking at what
businesses will have to do to implement the Directive. The
government has unfortunately spent almost no time at all trying to
work out what to do with the bits of the CCA that are incompatible
with the Directive, such as modifying agreements, multiple
agreements rules etc.
