Terms of the Consumer Credit Act 1974 provide protection for both trader and customer. Its introduction was welcomed by the retail credit industry, as it removed the anomalies of the Moneylender’s Act 1927, which with the Hire Purchase Acts preceded the new 1974 Act.
Covering a large number of varying agreements from credit cards and bank loans to hire purchase and leasing agreements, the Consumer Credit Act regulated such things as advertising, calculation of interest, and many other safeguards.
Why the Act Evolved
Prior to the 1974 Consumer Credit Act the borrower had little protection from unscrupulous lenders. Nor was it obligatory to make the borrower aware of the commitments they were entering into, or to disclose the true cost of borrowing. The first attempt at regulating consumer credit was in 1927; this, while providing a modicum of protection, such as allowing the courts to re-open harsh transactions and replace them, did little else for the borrower. The Act merely restricted advertising, and did not permit mailshots or canvassing. Later further legislation was introduced which included:
• Hire Purchase and Small Debt Act (Scot) 1932
• Hire Purchase Act 1938
• Hire Purchase Act 1964
Eventually these were grouped together to produce the Hire Purchase Act 1965. These Acts insisted that all agreements contained details of the terms of finance, and the suppliers of the goods were responsible for their quality. Also the hirer’s liability was limited, so when the agreement was terminated the hirer was restricted to paying the outstanding arrears at the time of termination, and an amount not exceeding 50 per cent of the total price. Further limitations were interposed in respect of repossession, and where a third of the total price had been paid by the hirer goods could not be repossessed without an order from the court. These rules still apply today.
Time to reflect
It was in 1964 we saw the ‘pause for reflection’ clause introduced. This gave the hirer time to reflect on an agreement signed away from trade premises. From this time on, if any financial agreement was signed in the borrower’s home, the borrower or hirer could cancel the arrangement within 14 days without loss or penalty.
Hire Purchase Act 1964 — part III
A major part of this Act, which remains in force today, relates to the rule where a purchaser of goods which are subject to an uncompleted hire purchase agreement cannot have clear title. The finance house can recover the goods, or sue for sums owing on the previous agreement or the value of the goods, whichever is the lesser amount. An exception to this rule is motor vehicles bought in good faith by a ‘private purchaser’ who was unaware of the existence of any other finance arrangement in respect of the vehicle. The Act excludes motor traders or finance houses active in the motor trade.
Consolidating the Acts
Regulation of the many forms of credit which we take for granted today was consolidated in a single Act in 1974. This embodied all the good points of the earlier Acts, and stated what type of secondary or allied charges were to be part of the total charge for credit, such as:
• option to purchase fees
• maintenance charges
• fees for the provision of security
• brokerage fees
Supervision of the licensing of all credit businesses including:
• credit reference agencies
• debt collectors
• finance brokers or agents
and enforcement of the Act were placed in the hands of one body, and controlled by the Director General of Fair Trading.
The second part of the Consumer Credit Act defines the contracts to which the Act applies. Irrespective of the type of agreement, providing the customer is an individual and the amount excluding charges is £15,000 or less, the agreement will fall within the terms of the Act. Exceptions are limited to:
• agreements in excess of £15,000
• where the borrower or hirer is a business
• ordinary trade credit
• loans with extremely low rates of interest
There is a fine line between a sole trader and an individual. Although one might expect someone purchasing or renting an item of business equipment to be installed in business premises could be constituted to be outside the scope of the Act, the courts have deemed these sort of transactions at times to be subject to the Acts, so care needs to be exercised.
Calculation of APR
Another function of the Act covered the calculation of the annual percentage rate (APR) of the interest charged, which now had to be disclosed to the borrower. Based on compound interest, and taking into account ancillary charges, a set of consumer credit tables stating the APR for the usual types of agreements are published by HM Stationery Office. These tables are available from them or from the Consumer Credit Trade Association.
A rough rule of thumb guide between flat rates of interest and APR is that the flat rate is usually half of the APR rate; depending on the period of repayment the actual difference can be marginally higher or lower than stated.
The Consumer Credit Act is a long and intricate piece of legislation. Only the surface has been scratched and exposed here. Anyone intending to offer consumer credit facilities to their customers, or intending to make a career in retail credit, should have full training.