FAQ: Consumer credit FAQs
22 FAQs people ask about consumer credit
- Do we need a licence to offer credit to consumers?
- Do we need a licence to offer credit to businesses?
- I’ve heard the Office of Fair Trading has closed – will my existing consumer credit licence still be legal?
- Can we allow a customer to pay us later, but not charge the customer interest, without a licence?
- What happens if we offer consumer credit without having the necessary licence?
- Does it affect us if a customer uses credit arranged with a separate company, such as a credit card, to buy from us?
- How do we get a licence to offer credit?
- What can we do if a licence is refused or revoked?
- How much does a licence cost and how long does it last?
- Is there any limit on the interest rate and fees we can charge?
- Are there any special rules for offering credit to people who have a poor credit rating?
- What security can we take for the amount we are owed?
- Can we pass the credit on to a third party?
- What information do we have to give the customer about interest rates and other costs?
- Do we have to give the customer the right to cancel a credit purchase agreement?
- What happens if the customer wants to pay the debt off early?
- What information do we need to give customers about their credit accounts?
- What action can we take if a customer fails to make the required payments?
- What are the rules on advertising consumer credit?
- Are there any special rules if our business involves hiring out goods?
- Are there any special rules if our credit agreement includes payment protection insurance?
- Are there any special rules if our business includes acting as a credit broker?
1. Do we need a licence to offer credit to consumers?
In most circumstances, yes.
There are a few exceptions. You do not need a licence just to accept payment by credit card (unless it is a credit card you've issued yourself). You do not need a licence to let customers pay for goods they have bought from you in four or fewer instalments, within a year from the date of sale.
2. Do we need a licence to offer credit to businesses?
You do not need a licence to offer credit to limited companies. You generally do need a licence to offer credit to businesses such as sole traders and small partnerships (with two or three partners), but not if the value of your sales is always more than £25,000.
3. I’ve heard the Office of Fair Trading has closed – will my existing consumer credit licence still be legal?
No. On 1 April 2014 the Financial Conduct Authority (FCA) took over regulation of consumer credit from the Office of Fair Trading (OFT). If you currently hold an OFT consumer credit licence and you continue to carry out consumer credit related activities, without registering for interim permission from the FCA, you can be prosecuted and fined or imprisoned (see 5).
4. Can we allow a customer to pay us later, but not charge the customer interest, without a licence?
You do not need a licence as long as the customer will pay in four or fewer instalments, within a year of the date of sale.
For example, you do not need a licence to make a daily supply (such as milk or newspapers) where you collect payment at the end of the month.
5. What happens if we offer consumer credit without having registered with the Financial Conduct Authority (FCA)?
Offering consumer credit without registering with the FCA is a criminal offence. You can be prosecuted and fined or imprisoned.
In addition, if the customer fails to make the required payments, you cannot enforce the agreement.
6. Does it affect us if a customer uses credit arranged with a separate company, such as a credit card, to buy from us?
As long as you did not introduce the customer to the credit card company, and the credit card issuer is not related to you (for example, part of the same group), you are not involved in offering the credit. You do not need to register to accept payment in this way.
7. How do we get a licence to offer credit?
On 1 April 2014 regulation of consumer credit transfered from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA). From September 2013, companies that want to operate consumer credit activities after the 1 April 2014 need to have registered with the FCA. If you already have a credit licence issued by the OFT you will need to register with the FCA now for an 'interim permission' that will allow you to continue trading legally until you get full authorisation from the FCA. If you fail to register, you will not be able to trade again until you have become fully-authorised by the FCA. Read more and register or apply for 'interim permission' on the FCA website.
The FCA will want to be satisfied that you are a 'fit person' to be registered. Broadly, this means that the FCA must believe that you will trade honestly and fairly with consumers, within the constraints of the law.
Problems that can prevent you being granted a registration include:
- Providing false or misleading information on your application.
- Evidence that you have previously offered credit without a licence or registration.
- A record of consumer complaints or breaches of consumer protection legislation.
- Similar problems relating to employees, agents or other individuals associated with your business.
Your registration can be revoked at any time if the FCA considers that you are no longer a fit person to hold one.
From the 1 April 2014, you will need to complete a more detailed application process for FCA authorisation. Read about offering credit on the FCA website.
8. What can we do if a licence is refused or revoked?
If the Financial Conduct Authority (FCA) decides to refuse or revoke a credit licence, an adjudicator will send you a notice giving the reasons.
If you want to present any arguments against these, you must write to the adjudicator within 21 days. You can provide written evidence or ask for a hearing. If you have said that you want to attend a hearing, you will be given at least 21 days notice of where and when you can do this. You can take a lawyer (or some other professional advisor) with you.
After the adjudicator has considered your evidence, you will be sent a written decision. If the adjudicator decides that you should not have a licence, you have a right of appeal.
9. How much does a licence cost and how long does it last?
If you already hold a consumer credit licence issued by the Office of Fair Trading, you will need to pay an additional fee when you apply to the Financial Conduct Authority (FCA) for interim permission, which is needed in order to continue your consumer credit related activities after 1 April 2014 (see 7). The fee is £350 for most firms and £150 for sole traders. This will cover you until you need full authorisation.
When you apply for full authorisation, the FCA will notify you of how much you will be charged. Not all firms will pay the same amount and the amount you pay will be dependent on the size of your business and the type of authorisation you are applying for. Businesses with ‘limited permission’ – those that are considered lower risk – are likely to have lower fees than those of higher-risk firms.
10. Is there any limit on the interest rate and fees we can charge?
There are no set limits on the interest rates and fees you can charge. However, a credit agreement can be challenged if the relationship is unfair to the consumer. As well as the level of rates and fees, the court would take into account the other terms of the agreement and how you have behaved (eg whether the customer has been misled).
Courts have wide powers if they find that a credit agreement is unfair: for example, you could be ordered to refund payments made by your customer. You can also face enforcement action from trading standards and other authorities to prevent future repetition of unfair trading practices.
Of course, there are also commercial reasons why it may not be a good idea to charge excessive interest rates or fees. For example, customers may deal with more competitive suppliers, and your reputation may suffer.
11. Are there any special rules for offering credit to people who have a poor credit rating?
If you are simply offering credit as part of selling your products, you are not generally obliged by law to take into account your customers' creditworthiness. If you wish to offer credit to individuals with a poor credit rating, and to charge correspondingly high interest rates and fees to protect yourself, you can do so. There would normally only be a problem if the relationship is unfair (see 10).
The situation is different if you are offering loans. The Office of Fair Trading (OFT) issued a series of guidelines, including the requirement that lending should be responsible and take full account of the borrower's circumstances. Failure to follow these guidelines is grounds for your credit licence to be revoked. A borrower could also apply to the court for relief on the basis that the relationship is unfair (see 10).
12. What security can we take for the amount we are owed?
Normally, businesses offering consumer credit as part of a sale do so without taking any security. Instead, you can include a clause in your terms and conditions of sale stating that the goods you have sold remain your property until they have been fully paid for. This allows you to take possession of them if your customer defaults.
If you will be requiring security for any credit you offer, you must make this clear in any advertisements. If the security will include the borrower's home, you must also include a warning in a specified format.
13. Can we pass the credit on to a third party?
You can include a right to assign the credit to a third party in the original agreement.
If the original agreement does not include this right, you cannot assign the credit without the borrower's consent. However, you can use a third party to chase payments if you choose (see 18). You might also be able to use the credit (or more typically all your outstanding consumer credit) as security for borrowing.
14. What information do we have to give the customer about interest rates and other costs?
Before the customer enters into a credit agreement, you must provide detailed financial information in a specified order. The required information includes:
- The Annual Percentage Rate (APR).
- The total amount payable.
- The size and timing of repayments.
- The total charge for credit (including any additional charges the borrower is required to pay).
- The rate of interest and how interest charges are calculated.
- Details of other charges (for example, if the customer defaults).
The rules and calculations can be complex. You should take professional advice to ensure that you provide the right information. Failing to do so can make it difficult to enforce a credit agreement. You could also face enforcement action from the authorities.
15. Do we have to give the customer the right to cancel a credit purchase agreement?
If you hold face-to-face discussions with a customer about a credit agreement (or the related purchase of goods or services), but they do not sign the agreement on your trade premises, the agreement must be cancellable. So, for example, if a customer comes into your shop to discuss a purchase, and then takes an agreement home to look at and sign, the agreement must be cancellable. Special rules apply if the credit is secured on land, or for the purchase of land.
If goods are being bought from a mail-order catalogue, the cooling-off period is 14 days from the date the agreement is signed. In any other case, the cooling-off period is five days from the date the customer receives a second copy of the agreement or a separate copy of the cancellation rights.
If the customer decides to cancel the agreement, both the customer and you must take steps to restore the position to how it was before you entered into the agreement. Typically, you will refund any money the customer has paid, and the customer will return any goods you have provided.
Bear in mind that there are separate regulations covering distance selling (eg selling by mail order or through your website), whether you are offering credit or not. The customer will usually be entitled to a cooling-off period during which the customer has the right to cancel the purchase and any related credit agreement.
16. What happens if the customer wants to pay the debt off early?
Customers are usually entitled to pay off consumer credit debts early if they want to, and to claim a rebate on the outstanding future interest charges. (This does not apply to running credit, like credit cards.) The customer is not entitled to any rebate on charges they have already had to pay — such as arrangement fees. The customer gives you notice (usually in writing) of their intention to pay the debt off early, and asks you for a settlement amount. You must reply within seven days.
The settlement date will normally be 28 days after the customer gives you notice. You are allowed to postpone settlement by a further month if the agreement lasts for more than a year.
17. What information do we need to give customers about their credit accounts?
If you offer running account credit (such as a store card) you are required to provide a monthly statement. Specific requirements include:
- Opening and closing balances.
- Payments and drawings.
- Interest and other charges.
- The rate of interest.
- The effect of only making the minimum payment, and of failing to make the minimum payment.
- How payments are allocated to outstanding balances.
- How disputes are handled.
There is a similar requirement to provide an annual statement to customers who have fixed sum credit. There are also rules on the information you must give customers who are in arrears or in default (see 18).
If at any stage a customer gives notice that they want to repay a consumer credit debt early, you are required to provide them with details of the amount to be paid (see 16).
Regardless of the specific legal requirements, it is good commercial practice to ensure that customers are given adequate information about their credit accounts, and are provided with clear notice if you plan to take any action because of late payment.
You should also bear in mind the separate requirements under Data Protection regulations. If a customer asks, you are usually required to provide a copy of any information you hold on them.
18. What action can we take if a customer fails to make the required payments?
If a customer has failed to make the required payments, you must send them a notice of default before you can take legal action. You can then take court action to enforce the agreement. Note that you can only charge the customer a default charge or your debt collection costs if the original agreement included this right.
If you decide to pursue the debt yourself, or using a debt collection agency, you could lose your consumer credit licence if you (or they) use any improper debt collection practices. For example, you must not:
- Send letters that look like official court document (this can be a criminal offence).
- Send any other misleading or false documents in an attempt to coerce payment.
- Harass the customer (for example, by sending threatening letters, or by calling them frequently or late at night).
19. What are the rules on advertising consumer credit?
Broadly speaking, advertisements must give a fair and reasonably comprehensive indication of the nature and cost of the credit. The rules apply to a broad range of 'advertisements' including mail shots, information on your website, and claims you make when telephone canvassing.
The regulations give detailed requirements, such as:
- When you are required to display a 'typical APR' and how you calculate it.
- What information you must give if the credit will be secured.
- How prominent information on credit charges must be.
You may want to take advice on the content of any advertisements before you publish them. Providing materially false or misleading information is an offence.
Read about misleading adverts on the Financial Conduct Authority website.
20. Are there any special rules if our business involves hiring out goods?
If you hire out goods to individuals, you need to check whether the hire agreement will be 'regulated'. Agreements are regulated if:
- The goods are hired to an individual or small partnership (with two or three partners).
- The agreement can last for more than three months.
- The hire is not for land, buildings, or utility meters.
If your consumer credit agreement is regulated, you should take advice to ensure that you provide a written hire agreement containing the required details and in the right form. You will also need to ensure that the customer signs the hire agreement. If the hirer has not signed any form of agreement, you will be unable to enforce it.
Note also that if the hire agreement is discussed face-to-face with the customer, and the agreement is not signed on your trade premises, there will usually be a cooling-off period during which the customer can cancel the agreement (see 15).
21. Are there any special rules if our credit agreement includes payment protection insurance?
If you provide payment protection insurance, you may need to be authorised by the Financial Conduct Authority (FCA) - previously the Financial Services Authority - as well as having a consumer credit licence. As this can be complex and involve significant expense, you should take advice.
Read guidance on payment protection insurance on the FCA website.
22. Are there any special rules if our business includes acting as a credit broker?
If you act as a credit broker, you cannot charge a consumer more than £5 if a credit agreement is not signed within six months of the introduction you made to a lender. In effect, you can only charge the customer for providing a successful broking service. This applies regardless of why the customer did not obtain the credit — including if the customer simply changes their mind.
If you have already charged the customer more than £5, you must refund the difference. However, you are not required to refund genuine expenses paid to independent third parties.
The article above was written with considerations from Corporate Law tutors in Lancaster and Commercial Law advisors based in Wigan. In relation to the article above our solicitors who serve areas such as Southport, are able to offer expert legal advice on this subject.
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