The Consumer Credit (Cost Cap) Instrument 2014 (“the Instrument”) is set to come into force on 2 January 2015 (“the Effective Date”) having been approved by order of the Board of the Financial Conduct Authority (“FCA”) on 6 November 2014.
The Instrument amends the Consumer Credit Sourcebook (“CONC”) which contains rules and guidance in relation to the FCA’s regime.
The Instrument introduces a price cap on High-Cost Short-Term Credit (“HCSTC”) loans intended to protect consumers from excessive charges when taking out such loans and from the rapid escalation of the debt.
As far as lenders are concerned, the aim of the Instrument is for them to concentrate on making better lending decisions.
There are three elements to the price cap, as follows:-
- An initial costs cap (in respect of interest and fees charged) of 0.8% per day calculated from the date on which the borrower draws down the credit until the date on which repayment of the credit is due under the loan agreement, but if the date of repayment is postponed the date to which it is postponed.
- Fixed default fees capped at £15.
- A total costs cap of 100% of the amount borrowed, i.e. no borrower will ever pay back more than twice the amount they borrowed.
Examples of charges covered by the cap are:-
(i) interest (which can only be simple) on the credit provided and/or on any charges levied;
(ii) a charge related to late payment by, or default of, the borrower;
(iii) a charge related to the transmission of credit or for using a means of payment to or from the borrower;
(iv) a charge relating to early repayment or refinancing or changing the payment date or termination of the loan agreement;
(v) a charge related to the application for, or drawing down of, credit; and
(vi) a charge for ancillary services related to the provision of credit.
The price cap includes third party debt collection or debt administration costs and any ancillary charges. However, if a lender is able to recover “damages” in court proceedings under an order these are outside the cap. As far as we can tell, this includes court fees and fixed solicitor’s costs under the Civil Procedure Rules.
The price cap does not apply to loan agreements entered into before the Effective Date unless supplemented or varied subsequently whereby a further charge is imposed in which case charges imposed before the Effective Date must be taken together with the new charges when calculating the price cap, e.g. if a lender rolls over or refinances an agreement and continues to charge interest then the price cap would apply but it would not do so where the variation is to postpone payment because the lender is exercising forbearance and is not levying any further interest or charges.
The attached table sets out the basis of the calculation of the price cap.
An agreement will be unenforceable if the price cap is breached. Whilst the borrower will still have to repay the credit, any charges levied will have to be repaid to the borrower within seven days of being requested to do so by the borrower. The lender must then give the borrower a minimum of 30 days to repay any outstanding principal. There does not appear to be any right of set off. In accordance with the principles of CONC 7, the financial circumstances of the borrower must be taken into account when deciding how long is reasonable to allow the borrower to repay the loan. Lenders are, in fact, encouraged to issue repayment schedules. Nevertheless as a last resort the lender remains entitled to take legal action to recover any outstanding monies.
HCSTC lenders must apply to the FCA for authorisation between 1 December 2014 and 28 February 2015. You should already have received a “Credit Ready” pack. Guidance has been produced in the form of a webinar which can be found on the FCA’s website:-
The price cap is to be reviewed two years after the implementation of the Instrument, i.e. during the first half of 2017. In the meantime, the FCA is conducting a thematic review into the debt recovery practices of HCSTC lenders and is due to report in early 2015. More will follow on this in due course. In the meantime, it seems to us that is business as usual as far as the collection of your debts is concerned.
This note has been produced by Fraser Brown Solicitors for general information only and no warranty or guarantee is given as to the accuracy, timeliness, performance, completeness or suitability of the information provided.