FOOL'S EYE VIEW
Loan Sharks To Get Their Comeuppance

By Jane Mack (TMFJane)
November 22, 2002

Isn't it typical? The moment you complain there's no news about something, along it comes. It happened to me following yesterday's article about how long it was taking the Government to review the 1974 Consumer Credit Act. Two hours after the article was written, up pops an email in my Inbox stating that there are plans to remove the financial lending limits that fall within the scope of the Act.

At the moment the Consumer Credit Act (CCA) excludes credit agreements for more than £25,000 (or £15,000 if the agreement was made before 1st May 1998). Mortgages are already outside the scope of the Act and will be regulated by the Financial Services Authority from 2004 anyway, but the financial limit has meant that any agreements for more than £25,000 do not fall within the scope of the Act.

You might think that £25,000 would be enough to cover most sorts of consumer credit apart from mortgages but last month the Consumer Credit Counselling Service revealed that the average level of unsecured debt of clients entering into their debt management programme topped £24,000 in the last quarter. It's easy to see that people who approach lenders, perhaps as a means of consolidating their debts, could be persuaded to borrow at least £25,001 to ensure they fall outside the protection of the Act.

Removing the limit will mean that loan sharks will find it much more difficult to evade the regulatory controls imposed by the Act.

However, such a step raises further questions. As we pointed out in yesterday's article, credit agreements can be either unenforceable, or only enforceable with the permission of the courts, if not properly executed in accordance with the CCA. Lenders are understandably concerned that if the financial limit is removed they stand to lose much more if an agreement turns out to be wholly and automatically unenforceable because of a technical error in the contract. They want the CCA to be changed so that all types of wrongly executed agreements can be decided by the courts if necessary.

The situation has been made even more complicated because of a court case in May 2001 called Wilson v First County Trust. Penelope Wilson borrowed £5,000 from a pawnbroker putting up her BMW as security. There was a £250 fee for drawing up the documents but in the contract it stated that she had borrowed £5,250 which wasn't strictly speaking the case. She defaulted on the loan and argued that under the terms of the CCA the agreement was entirely unenforceable; she didn't have to pay the money back and nor could they take the car. The County Court judge disagreed so she took it to the Court of Appeal - and won!

All well and good you might think. The CCA is very clear that if an essential mistake is made in a credit agreement then it renders it completely unenforceable.

However, the introduction of the Human Rights Act (HRA) in October 2000 appears to have put a spanner in the works. The HRA implements the European Convention on Human Rights and during the case the technical question was raised about whether such an error in the prescribed form deprived First County Trust of their rights under the Convention to enforce the agreement and to collect any relevant security ie: the car. Were the two Acts incompatible?

The Court of Appeal said they were and issued a Declaration of Incompatibility to the Government thus indicating that the CCA needed to be changed to bring it in line with the more important European Convention. The Government promptly appealed to the House of Lords against the decision and the case is still with our eminent judges so we're none the wiser for the moment.  

In the meantime, the relevant provisions of the Consumer Credit Act still stand, though for how much longer, who knows? And Mrs Wilson can still enjoy driving around in her BMW!

More: The Fool's Get out of Debt Centre | Consumer Credit Counselling Service