OFT Issues Guidance on Unfair Credit

The Office of Fair Trading has issued guidance on the operation of the Unfair Credit Relationships test which will be introduced as part of the reforms brought in by the Consumer Credit Act 2006. The test will come into effect in April 2007 for new agreements signed after that date, and April 2008 for current agreements.

The guidance fails to set out a comprehensive view as to what an unfair relationship is, and there will be considerable uncertainty until test cases have been taken in the courts. However, there have been some revisions since the OFT consulted on it last year, and the OFT expresses the view that the courts will be able to take action against high cost lending.

The guidance states:

4.20..in the OFT's view there is clearly scope for the court to find that a credit relationship is unfair on the grounds that it involves excessive costs for the borrower. Section 140A(2) requires the court to have regard to all relevant matters and these could include the cost of the credit agreement or any related agreement. This appears to be endorsed by Ministerial statements in Parliament during the passage of the Consumer Credit Bill.

4.21 For example, the rate of interest charged under a credit agreement, or the rate or amount of other fees or charges, may be so much higher than those applicable generally in the particular market sector, or payable by borrowers in similar situations, as to make the relationship as a whole unfair to the borrower. They may also, in the particular circumstances, be oppressive or exploitive of the individual borrower even if they are in line with rates prevailing at the time in the particular sector.

4.22 In addition, excessive prices may be accompanied by other unfair terms or practices which may contribute to an unfair relationship as well as being susceptible to possible Part 8 action in their own right."

Debt on our Doorstep will be looking to work with agencies interested in taking test cases in relation to the cost of credit from April onwards. It should be noted that the guidance indicates that the cost of linked transactions (for example payment protection insurance and default charges can also be considered by the courts as part of an assessment of unfairness).