Consumer Credit) Order 2008

House of Commons Regulatory Reform Committee Draft Legislative Reform (Consumer Credit) Order 2008 Third Report of Session 2007–08 Report, together with formal minutes and written evidence Ordered by The House of Commons to be printed 8 July 2008 HC 939 Published on 10 July 2008 by authority of the House of Commons London: The Stationery Office Limited £0.00 The Regulatory Reform Committee The Regulatory Reform Committee (previously the Deregulation and Regulatory Reform Committee) is appointed to consider and report to the House on draft Legislative Reform Orders under the Legislative and Regulatory Reform Act 2006. Its full remit is set out in S.O. No. 141, which were approved on 4 July 2007. Current membership Andrew Miller (Labour, Ellesmere Port & Neston) (Chairman) Gordon Banks (Labour, Ochil and South Perthshire) Lorely Burt (Liberal Democrat, Solihull) Mr Quentin Davies (Labour, Grantham and Stamford) Mr James Gray (Conservative, North Wiltshire) John Hemming (Liberal Democrat, Birmingham, Yardley) Mrs Sharon Hodgson (Labour, Gateshead East & Washington West) Mr Stewart Jackson (Conservative, Peterborough) Judy Mallaber (Labour, Amber Valley) Dr Doug Naysmith (Labour/Co-operative, Bristol North West) Mr Mark Prisk (Conservative, Hertford and Stortford) Mr Jamie Reed (Labour, Copeland) Mr Anthony Steen (Conservative, Totnes) Phil Wilson (Labour, Sedgefield) Stephen Hammond (Conservative, Wimbledon) was a Member of the Committee until 23 June 2008 when he was replaced by Mr Mark Prisk. Criteria against which the Committee considers each draft legislative reform order Paragraph (3) of Standing Order No.141 requires the Committee to consider any draft legislative reform order against the following criteria: … whether the draft legislative reform order — (a) appears to make an inappropriate use of delegated legislation; (b) serves the purpose of removing or reducing a burden, or the overall burdens, resulting directly or indirectly for any person from any legislation (in respect of a draft Order under section 1 of the Act); (c) serves the purpose of securing that regulatory functions are exercised so as to comply with the regulatory principles, as set out in section 2(3) of the Act (in respect of a draft Order under section 2 of the Act); (d) secures a policy objective which could not be satisfactorily secured by non-legislative means; (e) has an effect which is proportionate to the policy objective; (f) strikes a fair balance between the public interest and the interests of any person adversely affected by it; (g) does not remove any necessary protection; (h) does not prevent any person from continuing to exercise any right or freedom which that person might reasonably expect to continue to exercise; (i) is not of constitutional significance; (j) makes the law more accessible or more easily understood (in the case of provisions restating enactments); (k) has been the subject of, and takes appropriate account of, adequate consultation; (l) gives rise to an issue under such criteria for consideration of statutory instruments laid down in paragraph (1) of Standing Order No 151 (Statutory Instruments (Joint Committee)) as are relevant; (m) appears to be incompatible with any obligation resulting from membership of the European Union. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/regrefcom. A list of Reports of the Committee in the present Session of Parliament is at the back of this volume. Committee staff The current staff of the Committee are John Whatley (Clerk), Neil Caulfield, Inquiry Manager, and Liz Booth (Secretary/Committee Assistant). All correspondence should be addressed to the Clerk of the Regulatory Reform Committee, Delegated Legislation Office, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2837; the Committee’s email address is [email protected]. Draft Legislative Reform (Consumer Credit) Order 2008 1 Contents Report Page Summary 3 1 Introduction 5 2 What the draft Order proposes 5 Exemption from regulation for buy-to-let lending 5 Clarification on the giving of statements for fixed-sum credit agreements 7 Inclusion of definitions of ‘payments’ for the purpose of issuing notices of sums in arrears 8 3 Cause of the draft Order 8 4 Impact Assessment 9 5 Preconditions and tests 10 6 Consultation 11 Welsh, Scottish and Northern Ireland Ministers 11 7 Assessment of the draft Order 12 8 Parliamentary procedure 12 Formal Minutes 13 Appendix 1 14 Reports from the Regulatory Reform Committee in the last and current Session inside back cover Draft Legislative Reform (Consumer Credit) Order 2008 3 Summary The Legislative Reform (Consumer Credit) Order and Explanatory Document were laid on 17 June 2008 under section 14(1) of the Legislative Reform Act 2006. The purpose of the draft Order is to amend the Consumer Credit Act 1974 to exempt buy- to-let lending from regulation, clarify the position on the giving of statements for fixed- sum credit agreements and provide definitions of ‘payments’ for the purpose of issuing notices of sums in arrears. We draw notice to the fact that these ‘corrective’ measures are necessary because of the ill- considered effect of amendments to the 1974 Act by the Consumer Credit Act 2006. We agree with the Minister’s recommendation that the draft Order should be subject to the affirmative resolution procedure. Draft Legislative Reform (Consumer Credit) Order 2008 5 1 Introduction 1. The draft Legislative Reform (Consumer Credit) Order 2008 and the accompanying Explanatory Document (ED) were laid before Parliament by the Department for Business, Enterprise and Regulatory Reform on 17 June 2008 under section 14(1) of the Legislative and Regulatory Reform Act 2006 (LRRA). 2. The purpose of the draft Order is to rectify distortions introduced into the Consumer Credit Act 1974 by the Consumer Credit Act 2006 and thereby exempt buy-to-let lending from regulation1 in accordance with Government policy on mortgages, clarify the position on the giving of statements for fixed sum credit agreements and provide definitions of ‘payments’ for the purpose of issuing notices of sums in arrears. By doing this, the draft Order would remove burdens in terms of the financial costs which would arise if the proposed amendments were not made. The draft Order therefore aims to comply with section 1(2)2 and section 1(3)3 of the LRRA. Section 1 of the LRRA introduced power to remove or reduce burdens. 2 What the draft Order proposes 3. The Consumer Credit Act 1974 introduced a system for licensing and otherwise controlling traders involved with providing credit or the supply of goods on hire or hire- purchase. The Consumer Credit Act 2006 amended and updated the 1974 Act, in particular, by ensuring consumers were given clear information on the state of their credit accounts, improving consumers’ rights and access to redress and establishing a more targeted licensing regime for the regulation of consumer credit and hire businesses. 4. The draft Order makes three proposals: • exemption from regulation for buy-to-let lending; • clarification on the giving of statements for fixed-sum credit agreements; and • inclusion of definitions of ‘payments’ for the purpose of issuing notices of sums in arrears. Exemption from regulation for buy-to-let lending 5. The Consumer Credit Act 1974 as it currently stands, that is, as amended by the Consumer Credit Act 2006, does not achieve the original policy intentions for exempting buy-to-let lending. The Government never intended to regulate buy-to-let lending where the loan is secured as a first charge on the property in question and the owner or relative occupies or intends to occupy 40 per cent or more of the property. 1 For a definition of ‘regulated’ and ‘unregulated’ loans see Q1 of the Appendix, p14. 2 Provisions may be made whose ‘purpose is removing or reducing any burden, or the overall burdens, resulting directly or indirectly for any person from any legislation’. 3 Which amongst other things defines ‘burden’ as a ‘financial cost’. 6 Regulatory Reform Committee 6. Prior to April 2008 the majority of buy-to-let loans were exempt from regulation under the 1974 Act, which provided that an agreement was not a consumer credit agreement4 if, amongst other things, the credit provided exceeded £25,000. Section 2 of the Consumer Credit Act 2006 removed this limit with effect from April 2008, bringing all consumer credit agreements, regardless of value, into regulation unless specifically exempt. This potentially would include buy-to-let mortgages secured by a charge on the property. Section 16 of the 1974 Act does make provision for exempt agreements which are not regulated by that Act, but these exemptions are not comprehensive with regard to all buy- to-let lending (except where the loan is secured as a first charge on the debtor’s own home, in which case that home would be at risk if difficulties with repayment arose). 7. During the passage of the Consumer Credit Act 2006 the Government believed that the new business exemption introduced by that Act would apply to buy-to-let lending. This exemption excludes from regulation under the 1974 Act consumer credit agreements where the credit provided exceeds £25,000 and the agreement relates to the purposes of a business. But an agreement financing a one-off or small-scale purchase of property is a transaction more accurately described as an investment deal. As such it would not pass muster in terms of the definition of ‘business’ in section 189(1) of the 1974 Act. Section 189(2) of the Act provides that a person should not be treated as carrying on a business merely because he or she occasionally enters into transactions belonging to a business of that type.

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