Insolvency-specific case law has been quiet over the last couple of weeks, so I’ve taken a closer look at some summer publications that touch on insolvency matters.
I will start by apologising for the fact that likely this post will create more confusion than clarity!
Over the summer, BIS issued a consultation (plus impact assessments) on the Consumer Rights Directive, “Enhancing consumer confidence by modernising consumer law” (http://www.bis.gov.uk/Consultations/consultation-implementation-consumer-rights-directive), closing date 1 November 2012, and a standalone impact assessment, “Enhanced suspension of consumer credit licences” (http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/e/12-987-enhanced-suspension-of-consumer-credit-licences-impact), which explores the “preferred option” of introducing a change via the Financial Services Bill plus an OFT consultation in September 2012 on draft guidance. I read these documents whilst keeping in mind the question, what impact, if any, might these proposals have on IPs? I have to say that I discovered that this was a tricky question to answer given the plethora of existing regulations! There is a further BIS consultation, “Enhancing consumer confidence by clarifying consumer law” (http://www.bis.gov.uk/Consultations/consultation-rationalising-modernising-consumer-law?cat=open), closing date 5 October 2012. I have not reviewed this one, although it does encompass proposed changes to the Unfair Terms in Consumer Contracts Regulations 1999, so there may be some impact for IPs – and presumably, if there is, the OFT will revise its debt management guidance accordingly.
Consumer Rights Directive
The Consumer Rights Directive (“CRD”) was agreed by EU Member States in October 2011 and this BIS consultation explains how it is proposed the Directive will be reflected in UK statute. The focus of the Directive includes on transparency of information, particularly pre-contractual information, cancellation rights, and express consents for payments.
Readers will be aware that the OFT has issued guidance on how it expects consumer credit licence-holders who provide debt advice and debt management services (which, by the OFT’s definition, includes those who advise and assist debtors with IVAs and Trust Deeds) to demonstrate their fitness to hold a licence. The OFT’s debt management (and credit repair services) guidance (“DMG” http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/oft366rev.pdf), thus describes expected standards in relation to some areas that are likely to be impacted by the implementation of the CRD.
However, the CRD does not apply to “financial services”, which are defined as “any service of a banking, credit, insurance, personal pension, investment or payment nature” (Art 2(12)), and BIS’ CRD consultation states that “The Financial Services (Distance Marketing) Regulations 2004 will remain in force, offering consumer protection for financial services sold at a distance. There are also additional protections through FSA rules, under the Financial Services and Markets Act 2000, offering protection for certain off-premises sales as well as on-premises sales” (footnote on page 28).
But are the provision of IVAs and Trust Deeds caught by this “financial services” exemption? To my mind, helping debtors avail themselves of statutory insolvency processes does not fit exactly the CRD definition (which is the same as the definition in the Financial Services (Distance Marketing) Regulations 2004). However the OFT DMG states: “In the OFT’s view, a licensee who provides debt management services or credit information services will be providing financial services and those that do so at a distance should comply with the Financial Services (Distance Marketing) Regulations 2004” (paragraph B.8). It is noteworthy that the OFT’s previous DMG (issued September 2008) referred to the Consumer Protection (Distance Selling) Regulations 2000 as setting down the requirements for providers of debt management services, but this does not appear in the current DMG. Presumably therefore, the OFT had reconsidered its views on which regulations apply sometime before the current DMG was issued in March 2012.
If the OFT’s (current) view is correct, then it would seem to me that very little UK statute arising from the CRD will impact IPs – it is anticipated that the Consumer Protection from Unfair Trading Regulations 2008 and the Provision of Services Regulations 2009 will continue in force – and thus we can rest easy that the outcome of this consultation will not alter IPs’ pre-Nominee/Trustee engagement with debtors (although the Cancellation of Contracts made in a Consumer’s Home or Place of Work etc. Regulations 2008 and the Consumer Protection (Distance Selling) Regulations 2000 will be revoked and replaced). But can we..?
Then again, should we be concerned even if the CRD does stray into IPs’ work? In my view, much of the proposals seem common-sense, concerning the provision of thorough information to consumers about the service to be provided, charges to be made, cancellation rights, etc. Thus, implementation of the CRD may require IPs to revisit, and probably lengthen, their engagement letters and terms and conditions – and some provisions may prove cumbersome to translate in relation to the provision of IVAs or Trust Deeds – although much of the principles of transparency, fairness etc., seem to be covered already by the OFT DMG and related regulations.
In researching this matter, I got to the bottom of one significant change in the OFT DMGs that arose due to the OFT’s shift away from the Consumer Protection (Distance Selling) Regulations 2000 to the Financial Services (Distance Marketing) Regulations 2004. The Distance Selling Regs 2000 require only a 7 working day cooling-off period, but the Financial Services Regs 2004 require 14 calendar days (and the on-consumer-site Regs require 7 calendar days). Thankfully (in the interests of consistency at least), the CRD consultation proposes to change the cooling-off period for both off- and on-site sales to 14 calendar days, which would bring it in line with the selling of financial services.
Enhanced Suspension of Consumer Credit Licences
At present, when the OFT considers a consumer credit licence-holder is unfit, the licence remains in effect until all rights of appeal have been exhausted. The appeal process can take up to two years, during which time a licence-holder may continue to trade uninterrupted. Although it is expected that the new Financial Conduct Authority will take over credit regulation from the OFT in April 2014, the BIS select committee and others have called for more immediate changes. Thus, it is proposed that with effect from spring 2013 the OFT will have to power to suspend immediately a business’ consumer credit licence where the OFT considers that there is a risk of serious consumer detriment.
Although this change is clearly welcome given the worrying companies that pop up from time to time, I have been aware of “minded to revoke” notices issued by the OFT in the past on businesses whose practices, in my mind, should not be fatal (they are either easily rectified or in fact defensible). It seems to me that the OFT has only really been aware of IVAs and Trust Deeds in the past four years or so and its knowledge still seems somewhat patchy (perhaps not helped by the regular rotation of staff to different positions in the department). The Impact Assessment states that the new power would only be used against businesses that cause significant and ongoing harm to consumers and it defines consumer detriment as including “being sold inappropriate or more expensive credit products due to poor or misleading customer advice, provision of incomplete or incorrect customer information, harassment of customers, delays in providing refunds, deducting additional fees without informing the customer etc.” (paragraph 33).
Although I take some comfort in the Impact Assessment’s statement that “the OFT is in close contact with firms under investigation and the firms have the opportunity to explain their behaviour etc and alter it if required” (paragraph 32), and thus perhaps the “minded to revoke” process or something similar may still be used to persuade firms to fix deficiencies or to convince the OFT that in fact they are compliant, clearly the impact on a business of an immediate licence suspension would be enormous. Therefore, I hope that the OFT remains – and perhaps becomes more – open to engagement with licence-holders who are endeavouring to be compliant, some of whom may have suffered temporary lapses in performance or who may hold a different opinion, for example, on what constitutes correct or complete information.