Since April 2007 the courts have been given wide powers to assist a
debtor once it considers that his relationship with his finance
provider is ¡§unfair¡¨ to the debtor. This replaces the
extortionate credit bargain. In addition to shifting the focus away
from the charge for credit, the key difference is that it enables
debtors to challenge finance company behaviour, both before and
after the agreement is entered into. This meets one of the key
objectives of the white paper, namely to allow consumers to
challenge lender behaviour throughout their relationship.
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The potentially frightening thing here for finance companies is the
breadth of the discretion given to the courts. The government made
a point of refusing to give examples of what it perceived to be an
¡§unfair relationship¡¨, despite various attempts during the
passage of the bill through parliament. Hence the court will look
not only at the fairness of the contractual terms, but also the way
in which the contract was introduced, negotiated, administered and
enforced. Key factors are likely to include:
- fair and open dealing e.g. whether the contract was drafted in
plain English and is easily understood with no concealed pitfalls
or traps, whether the debtor has agreed to terms he had little
opportunity to consider or become familiar with, whether sufficient
prominence has been given to terms which disadvantage the debtor
etc. - any lack of transparency from the finance company or its
associates - whether any advantage is being taken of the debtor’s
circumstances, including their need for the borrowing, lack of
experience and naivety in financial transactions (a particular
problem for the sub-prime market) - a failure to comply with any statutory requirement, such as
details of cooling off periods and cancellation rights
The test does not only affect new agreements. The DTI has
ensured that it can be used from April 6 2008 to challenge all
existing agreements, provided they continue beyond that date.
The final bit of bad news for the finance industry is that the
burden of proof is on the lender ¡V all the debtor has to do is
call foul, and it will then be for the finance company to prove
that the relationship was fair. Neither will debtors be deterred by
either the potential cost of litigation or going to court. They can
go, free of charge, to the Financial Services Ombudsman, who is
neither bound by legal precedent nor from whose decision there is
any automatic right to appeal
Powers of redress
Once a finance company has failed to establish that the
relationship was fair, the court has wide-ranging powers of
redress, including ordering amounts to be repaid to the debtor,
preventing the lender from exercising his rights under the
agreement, reducing the amount payable or extending the term of the
agreement. You should also expect the OFT to take an interest too
¡V any unfair relationships may be a factor considered when your
licence is up for renewal, and the OFT may seek undertakings or
orders prohibiting unfair practices.
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By GlobalDataNot surprisingly, consumer groups such as the National Consumer
Council and Citizens¡¦ Advice have praised the reforms as
representing very good news for consumers. So how can finance
companies protect themselves against the newly empowered
debtor?
The FSA has published a series of papers to try and clarify
how it defines ¡¥fairness¡¦. They have stressed that the concept is
not necessarily one-sided ¡V customers must still continue to take
responsibility for their own decisions.
Nevertheless you should review all credit agreements and processes
to ensure that in every case:
- debtors get what they pay for and fully understand the reality
of the finance sold to them - debtors are not sold inappropriate products in a ¡¥pushy¡¦
manner - you are ready to sort mistakes out quickly and are prepared to
offer fair compensation at the earliest opportunity in all your
dealings with consumers you aim for clarity and plain English,
empathy and flexibility and err on the side of generosity - you keep comprehensive and easily retrievable records of all
your dealings with your debtors.
These records should include notes of all meetings, telephone
calls and emails involving the debtor. Also ensure you obtain
comprehensive information about your potential customer at the
outset, and keep this information under review during the course of
the agreement. These details should include enough information to
assess the health, capacity, and business experience of debtors,
and whether they are under financial pressure etc. You may even be
expected to verify these details and not simply rely on the form
completed by your customer.
The challenge for the finance industry is to embrace the changes.
The new legislation undoubtedly packs a big punch. Finance
companies must be ready for an increasing number of customers to be
prepared to throw it.
The writer is head of the finance litigation team at Ford
and Warren solicitors; john.flint@forwarn.com
