The Financial Conduct Authority requires firms engaged in consumer credit lending to provide adequate explanations in its pre-contractual disclosures in order to place the borrower in a position to assess whether the agreement is adapted to the borrower’s needs and financial situation under paragraph 4.2.5R of the Consumer Credit Sourcebook (CONC).
The explanation should enable the borrower to make a reasonable assessment as to whether the borrower can afford the credit and to understand the key associated risks under paragraph 4.2.6 of CONC.
It is accepted that the use of remote channels, such as the internet, by their nature, limit the Company’s ability to take a view on the borrower’s level of understanding of explanations provided. The Company will thus need to advise borrowers how they can ask for further information and explanation (in accordance with the requirement of paragraph 4.2.5(1)(d) of CONC). It should therefore, for example, consider providing (local rate) telephone contact details for those borrowers who may wish to seek further information and explanation.
The Company can give advice and explanation to borrowers orally or in writing except as provided for in paragraph 4.2.5(4) of CONC. This states that where the explanation of any of the matters specified in –
- Paragraph 4.2.5(2)(a) (“the features of the agreement which may make the credit to be provided under the agreement unsuitable for particular types of use”),
- Paragraph 4.2.5(2)(b) (“how much the borrower will have to pay periodically and, where the amount can be determined, in total under the agreement”); or
- Paragraph 4.2.5(2)(e) (“the effect of the exercise of any right to withdraw from the agreement and how and when this right may be exercised”)
is given orally (but not necessarily in person – for example where the transaction takes place in whole or in part over the telephone) to the borrower, the explanation of the other matters specified in paragraph 4.2.5(2) of CONC, namely:
- Paragraph 4.2.5(2)(c) (“the features of the agreement which may operate in a manner which would have a significant adverse effect on the borrower in a way which the borrower is unlikely to foresee”; and
- Paragraph 4.2.5(2)(d) (“the principal consequences for the borrower arising from a failure to make payments under the agreement at the times required by the agreement, including, where applicable and depending upon the type and amount of credit and the circumstances of the borrower:
- the total cost of the debt growing;
- incurring any default charges or interest for late or missed payment or under-payment;
- impaired credit rating and its effect on future access to or cost of credit;
- legal proceedings, including reference to charging orders (or in Scotland, inhibitions), and to the associated costs of such proceedings; and
- repossession of the borrower’s home or other property and the advice required to be provided in accordance with paragraph 4.2.5(1)(b) of CONC (namely that the borrower considers the information which is required to be disclosed under section 55 of the Consumer Credit Act and that he is able to take it away), must be provided orally to the borrower before the consumer credit agreement is made (even where written explanations are also provided).
Consequently, then, where these criteria are met, the Company must:
- orally advise a borrower to consider the information which is required to be disclosed to him under section 55 of the Consumer Credit Act and, where this information is disclosed in person to him, that the borrower can take it away with him; and
- orally explain to a borrower the features of the agreement which may operate in a manner which would have a significant adverse effect on the borrower in a way which is unlikely to be foreseen; and
- orally explain to a borrower the principal consequences for the borrower arising from a failure to make payments under the agreement at the times required by the agreement including the matters contained in paragraph 4.2.5(2)(d)(i) – (v) of CONC;
Notwithstanding whether the information is given orally or in written form, the Company must also:
- inform the borrower that entering into a loan agreement with us would be unsuitable to support sustained borrowing over long periods and would be expensive as a means of longer term borrowing;
- inform the borrower of the effect of refinancing or otherwise extending the duration of the loan or loan agreement;
- not encourage or induce a borrower to waive any of the borrower’s rights;
- enable a borrower to request and obtain further information and explanation about a regulated credit agreement without incurring undue cost and delay;
- not require a borrower to acknowledge that the information and explanations that the Company has provided are adequate to satisfy the requirements in CONC; and
- even where the borrower states that there is no need for an explanation of the loan agreement, the Company must comply with the requirements of CONC.
The Financial Conduct Authority takes the view that there needs to be an opportunity for a degree of ‘interactivity’ between the borrower and the Company (as creditor) such that the borrower is afforded the opportunity, before entering into the agreement, to obtain answers to questions about the proposed agreement, in accordance with the requirement of paragraph 4.2.5(1)(c) of CONC.
In the case of telephone (or face-to-face) transactions in particular, the opportunity for interactivity between the borrower and the Company should better enable the Company to form a view as to whether the borrower has been placed in a position enabling him to assess whether the agreement is adapted to his needs and is affordable given his financial situation – or whether further explanation should be provided. It is unlikely, in the Financial Conduct Authority’s view, that this could be achieved solely by providing the borrower with a written pro-forma.
On-line applications by their nature limit the Company’s ability to ascertain the borrower’s level of understanding of explanations provided. This can be made more ‘interactive’ by the borrower being able to obtain access to an appropriately comprehensive online ‘FAQ’ on the Company’s web-site or by being able to speak to a representative of the on-line provider. However, the borrower should pass through screens containing the required information and explanations, giving the borrower the opportunity to see and read the explanations provided. Merely providing a link to where such information can be found is unlikely to satisfy the requirements in paragraph 4.2.5R of CONC.
Continuous Payment Authority (“CPA”)
The CPA is a type of regular automatic payment that can be set up using the borrower’s debit or credit card. The CPA attaches to the borrower’s relevant bank account or credit card account to which that debit or credit card is linked.
The CPA is a form of consent given by a borrower for a firm to make one or more requests to a payment service provider for one or more payments from the borrower’s payment account. These terms must be disclosed and agreed through the loan application process. It must be noted that the CPA does not operate as a direct debit, standing order or similar payment mechanism. Once agreed, the CPA allows the Company to take a series of agreed payments using the borrower’s debit card without having to seek express authorisation for every payment. By providing the Company with their debit card details, and not opting out of the CPA, the borrower authorises the Company to take payment by debiting the relevant bank account.
It is imperative that all borrowers are provided with an adequate explanation of the following matters as detailed before entering into a loan agreement as detailed in paragraph 4.6.2R(2) of CONC:
- what a continuous payment authority is and how it works;
- how the continuous payment authority will be applied by the firm, including that it may only be used twice to collect the whole sum due in relation to the agreement or where the agreement provides for repayment in instalments, in relation to an instalment;
- how the borrower can cancel the continuous payment authority;
- whether alternative repayment options are available;
- the choice of an appropriate due date for payment;
- the choice of an alternative payment date (if applicable);
- the consequences if sufficient funds are not available on the due date (or an alternative payment date if agreed);
- whether further attempts may be made to collect payment and, if so, the basis on which further attempts would be made, the days or period over which the further attempts would be made and the frequency of the further attempts;
- communicating that the firm will not seek part payment (a sum due which is less than the full sum due at the time the firm’s payment request is made) unless the firm is willing to accept such less sum and, after being notified of that sum and when a payment request would be made, the borrower has given express consent to the firm to make such a payment request; and
- whether default fees and other charges may be added and, if so, the circumstances in which these may be incurred and the amount of such fees and charges or the basis on which they will be calculated.
The terms of a CPA must also be included in the loan agreement provided to the borrower.
The Company must not exercise its rights under the CPA:
- unless it has been explained to the borrower that the continuous payment authority would be used in the way in question;
- other than in accordance with the terms specified in the loan agreement;
- if the borrower provides reasonable evidence to the Company of being in financial difficulties and the borrower cannot afford to repay the debt;
- if the Company otherwise becomes aware of the borrower being in financial difficulties and that the borrower cannot afford to repay the debt;
- if the Company has requested a payment service provider to make a payment under a continuous payment authority in connection with the same agreement on two previous occasions and those previous payment requests have been unsuccessful. However, if the Company:
- notifies the borrower of the refusal of the payment requests
- reminds the borrower of the matters in paragraph 4.6.2R(2) of CONC (see above), taking account of any proposed changes to the terms of the continuous payment authority that will apply following the refinance if the borrower consents; and
- the borrower gives express consent to the firm further exercising its rights under the continuous payment authority following the refinance;
the Company may then make further payment requests under the continuous payment authority following the refinance.
- [There is a general prohibition on making a further payment request under a CPA where the loan agreement provides for repayment in instalments and the Company has on two previous occasions made a payment request under a continuous payment authority to collect (in whole or in part) the same instalment due under the agreement which have been unsuccessful. This prohibition does not apply if the subsequent request is in accordance with paragraph 7.6 of CONC and is in the course of a dialogue between the firm and the borrower in which:
- the Company notifies the borrower of the refusal of the payment requests;
- repayment of the instalment has been made using a method other than a continuous payment authority and the borrower is not in arrears; and
- the Company has reminded the borrower of the date and amount of the next instalment.]in addition, where the general prohibition outlined above is applicable and the Company exercises forbearance within the meaning of paragraph 6.7.17R of CONC, the Company must not make a further payment request under the continuous payment authority unless
– a payment request is in accordance with CONC 7.6; – the firm notifies the borrower of the refusal of the payment requests; and – in the course of a dialogue between the firm and the borrower, the firm reminds the borrower of the date and amount of the next instalment and following which the borrower gives express consent to further payment requests being made under the continuous payment authority.
- equally, where the prohibition above applies and the Company adds no charge or additional interest in connection with missing a payment on the due date, the Company must not make a further payment request under the continuous payment authority to collect the instalment or a payment request unless sub-paragraphs (i) – (iii) above are complied with.
- where the sum requested under the CPA is less than the full sum due at the time the request is made unless the Company: following contact with a borrower, refinances the agreement in accordance with paragraphs 6.7.17R to 6.7.23R of CONC by granting an indulgence which allows for one or more repayment of a reduced amount under a repayment plan; notifies the borrower of the number and frequency of repayments and their amount under the repayment plan; and
- the borrower gives express consent to the firm to make payment requests to collect the repayments notified under the plan
although this does not prevent the Company accepting payment (including a part payment) from a borrower using a means of payment other than under a continuous payment authority, e.g. a borrower consenting separately that a single payment of a specified amount may be taken on the same day.
The Company must not improperly or unfairly inhibit or discourage a borrower from cancelling a continuous payment authority, and the Company must cease to exercise its rights under the continuous payment authority once it is notified that the continuous payment authority has been cancelled.
The borrower may choose an appropriate due date for payment. If sufficient funds are not available on the due date, the Company will contact the borrower to establish the reason(s) for non-payment.
The Company may seek to collect a lower payment or may establish a new financing arrangement following consultation with the borrower.
The Company must notify the borrower prior to payment(s) falling due that it will be seeking payment under the CPA. It must also notify the borrower of any unsuccessful attempts to elicit payment under the CPA. In the event of default, the following fees may be charged to the borrower:
In the event that your repayment is not received within three days from the due date: £15.00. Interest on all payments at the rate of 0.7% per day subject to the total amount of interest payable under this agreement not exceeding 100% of the amount of credit provided, including interest, fees and charges.
The borrower must notify the Company immediately in the event that their bank account and/or debit card details have changed for whatever reason.
The borrower can cancel the CPA with the bank or card provider and/or with the Company
Any payments taken prior to cancellation being received by the Company will only be considered for a full or partial refund at the Company’s discretion.
It must be stressed to the borrower that if they cancel the CPA, they will still be responsible for paying any money owed under the agreement (including any interest and charges that may accrue). They should also ensure that they then agree with the Company appropriate, alternative means of repayment.
It is imperative to note that the mere fact that a borrower might state or imply that he does not require an explanation of the credit product does not absolve the Company from the legal responsibility of providing an adequate explanation. Further, the Company should not encourage the borrower to waive his right to a full explanation.
An adequate explanation should be given for each new regulated consumer credit agreement before it is made (including any modifying agreement).