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The Law and Practice of International Banking, 2nd Edition by Proctor, Charles (1st March 2015)

Part A Regulatory Matters, 4 The Regulation of Lending Business

From: The Law and Practice of International Banking (2nd Edition)

Charles Proctor

Bank supervision — Lending and credit — Investment business — Bank of England

(p. 57) The Regulation of Lending Business


4.01  As noted earlier, at least in terms of general perception, the acceptance of deposits is one side of the banking coin; lending is the other side. Yet, whilst deposit-taking business has been shown to be quite closely regulated, the opposite is true of lending business. Apart from very specific cases in which the bargaining position of the borrower is seen to be particularly weak, the making of loans and the terms on which they are to be made available is essentially unregulated in the UK.

Consumer Credit


4.02  The provision of credit to individual borrowers is regulated by the Consumer Credit Act 1974 (as amended).1 It should be appreciated that the scheme is generally limited to loans to natural persons and that the scope of regulation does not apply to corporate loans.2 The 1974 Act was designed to implement a number of the proposals made by the Crowther Committee on Consumer Credit.3 The Act replaced something of a patchwork quilt of legislation, including (p. 58) the Pawnbrokers Act 1872 and the Moneylenders Acts 1920 and 1927. The 1974 Act also replaced the Hire Purchase Act 1975, which was itself introduced to deal with the increasing practice of buying cars, household goods, and other items on deferred payment instalments. As noted below, the 1974 Act was amended and updated in various respects by the Consumer Credit Act 2006.4

4.03  The 1974 Act was accordingly designed to secure a measure of protection for users of consumer credit who were clearly at a disadvantage in dealing with lenders or other suppliers of credit. In line with the objective of protecting consumers (but not those who were perceived to enjoy greater personal bargaining power), the 1974 Act originally applied only to credit agreements of up to £5,000. Inflationary factors led to the periodic increase of this amount, ultimately to £25,000.5 The changes introduced by the Consumer Credit Act 2006 have, amongst other things, abolished the concept of a monetary limit. In its place, a new exemption for high net worth individuals has now been introduced.6

4.04  Until recently, an entity which proposed to carry on a business7 of providing consumer credit or consumer hire facilities, or certain other, ancillary activities could only do so if it was licensed for that purpose by the Office of Fair Trading (OFT). However, with effect from 1 April 2014, responsibility for the supervision of consumer credit was transferred to the FCA and was brought within the scope of the Regulated Activities Order.8 It is not intended to discuss the rationale for the transfer in any detail but, in essence, the general idea was to bring consumer credit into the domain of the FCA so that its wider powers of supervision and enforcement could be used in that sphere.9

4.05  The main consequence of the transfer of consumer credit regulation to the FCA has been to subject authorized firms to the rules contained in the FCA Handbook and, in particular, to CONC, the Consumer Credit Sourcebook. Lending business that falls within the scope of CONC is described as ‘credit-related regulated activities’. A number of other segments of the FCA Handbook are stated to apply to such firms, including:

  1. (a)  the Principles for Business set out in PRIN, including the duties to treat customers fairly, and similar matters;

  2. (p. 59) (b)  reporting and supervision issues under the Supervision Manual (SUP); and

  3. (c)  rules as to complaints handling as set out in the Complaints Sourcebook (DISP).

4.06  CONC then goes on to set out a series of specific rules for consumer credit business, including:

  1. (a)  certain general principles, such as a duty not to use misleading business names or to subject customers to high pressure selling techniques;10

  2. (b)  requirements about financial promotions, including a ‘clear, fair and not misleading’ rule, a requirement to include risk warnings in short term/high cost credit;11

  3. (c)  Requirements as to conduct and documentation both pre- and post-contract;12

  4. (d)  a requirement to lend in a responsible manner13 and various rules as to the handling of arrears and enforcement processes.14

4.07  Whilst responsibility for the regulation of consumer credit has thus been passed to the FCA, the 1974 Act and its subsidiary legislation remains the source of the rules that govern the content of the documentation and similar matters.

4.08  It may therefore be easiest at the outset to consider the permissions regime applicable to consumer credit business. It will then be possible to turn to the provisions of the 1974 Act.

The Permissions Regime

4.09  The starting point is now provided by Article 60B of the Regulated Activities Order, which states that ‘entering into a regulated credit agreement as lender is a specified kind of activity’ (ie an activity for which FCA permission is required). It is further provided that: ‘It is a specified kind of activity for the lender or another person to have the right to exercise the lender’s rights and duties under a regulated credit agreement.’ The latter provision makes it clear that a person who does not make the original loan but acquires the benefit of it by assignment will also require FCA permission for that purpose.

4.10  It will be apparent from para 4.09 that the definitions of ‘credit agreement’ and ‘regulated credit agreement’ lie at the heart of this sphere of regulation. Article 60B(3) explains the position as follows:

A ‘credit agreement’ is an agreement15 under which the lender provides credit;16

(p. 60)

  1. (a)  to (i) an individual,17 (ii) an unincorporated association which comprises at least one individual, or (iii) a partnership of two or three persons, at least one of whom is an individual;18

  2. (b)  A ‘regulated credit agreement’ is an agreement which (i) falls within the definition outlined in (a) above and (ii) is not an ‘exempt agreement’ under articles 60C–60H of the Regulated Activities Order.

4.11  It has thus been determined that ‘regulated credit agreements’ are likely to involve private individuals or small business structures that comprise or include individuals. Even then, however, some agreements will still be exempt from regulation. The exemptions listed in articles 60C–60H of the Regulated Activities Order are of varying degrees of importance in the present context. Some exemptions depend upon the nature of the lender, whilst others depend upon the purpose of the proposed loan.

4.12  Article 60C provides various exemptions in relation to the nature of the agreement at hand. In essence, a credit agreement is exempt if it falls within any of the following categories:

  1. (a)  it is a regulated mortgage or a regulated home purchase plan, since these are subject to another head of regulation;19

  2. (b)  it is a contract for the provision of credit not exceeding £25,000 which is to be used wholly or predominantly for business purposes;20

  3. (c)  it is a credit agreement made in connection with trade in goods or services involving at least one country outside the United Kingdom and the credit is provided to the borrower in connection with its business.

4.13  Article 60D provides an exemption for transactions to finance the purchase of land for non-residential purposes. In this case, the credit agreement is exempt if (i) it is secured by a (p. 61) legal or equitable mortgage on land and (ii) less than 40 per cent of the land is to be used as a dwelling by the borrower or a close relative.21

4.14  Article 60E of the Regulated Activities Order states that certain categories of credit agreement will be exempt if the lender meets stated criteria. The provision is relatively detailed but, insofar as it is relevant to banks, it may briefly be summarized as follows:

  1. (a)  a loan agreement relating to the purchase, refinancing or development of land is an exempt agreement if the lender is a local authority, or another entity specified by the FCA for the purposes of this provision. The specified list includes banks, building societies, and insurers;22

  2. (b)  a credit agreement is exempt if (i) the lender is an investment firm or a credit institution and (ii) the agreement is to allow the borrower to carry out transactions in financial instruments with the lender. Loans made by such entities to facilitate transactions in shares will thus be exempt. It is suggested that the exemption should also apply where the institution is providing discretionary portfolio management services (ie where it buys and sells securities within the scope of a pre-set mandate but without further reference to the borrower). However, the point is not entirely clear because, in such cases, the borrower does not himself ‘carry out a transaction’ relating to securities;

  3. (c)  Article 60F of the Regulated Activities Order provides for a series of exceptions by reference to the total number of payments to be made under particular types of credit agreement;

  4. (d)  Article 60G provides for a further set of exemptions where the total charge for credit falls below stipulated thresholds;

  5. (e)  Article 60H provides a final exemption where the borrower is an individual. An agreement which is either secured on land or involves credit exceeding £60,260 will be exempt if (i) the agreement includes a declaration by the borrower that he agrees to forego the protection otherwise applicable to a regulated credit agreement and (ii) a statement has been made as to the income or assets of the borrower and provided to the lender before the agreement was entered into.23 In particular, the borrower must sign a statement to the effect that he is a ‘high net worth individual’ and various other formalities must be met.24

Types of Consumer Credit Agreement

4.15  The 1974 Act classifies different types of regulated credit agreement since differences of detail apply to the different categories of transaction. Specifically:

  1. (a)  ‘running account credit’ involves an arrangement under which the borrower can draw cash, goods, and services up to an overall limit, taking account of amounts paid into (p. 62) the account by the borrower from time to time.25 Obvious examples of this type of arrangement include a bank overdraft26 and a credit card;

  2. (b)  ‘fixed sum credit’ is any form of credit other than a running account27 and would include a term loan or a sale of goods on deferred terms;

  3. (c)  a ‘restricted use credit agreement’ is an agreement under which the credit is to be used to finance a purchase of goods or services from the creditor (eg a credit sale agreement), to finance a transaction with a third party (eg pursuant to a credit card agreement), or to refinance existing indebtedness of the borrower.28 Any other type of consumer credit arrangement is an ‘unrestricted use’ agreement;

  4. (d)  a ‘debtor–creditor–supplier’ agreement29 is a regulated agreement which is (i) a restricted use credit agreement to finance a transaction between the debtor and the creditor (eg a credit sale agreement) or (ii) a restricted use agreement to finance a transaction between the debtor and the supplier under pre-existing arrangements between the debtor and the supplier (eg under a credit card agreement);

  5. (e)  a ‘debtor–creditor’ agreement is a regulated agreement (i) to finance a transaction between a debtor and a supplier but which is not a debtor–creditor–supplier agreement (ie because there is no pre-existing arrangement between the supplier and the creditor)30 or (ii) which is a restricted use credit agreement to refinance existing indebtedness of the borrower;

  6. (f)  a ‘credit token’ agreement is an arrangement under which the creditor or a third party at his request will provide cash, goods or services on credit. Again, credit cards are ‘credit tokens’ for these purposes.

4.16  It may be important to place a particular agreement in the correct category because different agreements may attract different types of statutory protection. For example, only certain types of agreement attract a cancellation right31 and a creditor is only responsible for breaches of contract on the part of the supplier in the case of a debtor–creditor– supplier agreement where there are pre-existing arrangements between the creditor and the supplier.32

(p. 63) The Effect of Regulation

4.17  If a bank or other lender intends to carry on consumer credit business, then the following matters will require consideration:

  1. (a)  as already noted, a requirement for FCA permission will apply;

  2. (b)  the content of business advertisements will be subject to control;

  3. (c)  the terms of consumer credit agreements and the formalities associated with them are likewise subject to detailed regulation;

  4. (d)  the 1974 Act regulates certain conduct and liabilities arising during the currency of the contract;

  5. (e)  the court has certain powers of intervention; and

  6. (f)  it is necessary to note certain recent reforms to consumer credit law as a result of the EU Directive on Consumer Credit.

4.18  Each of these issues will be considered in turn. It should be repeated that the discussion is not intended to provide a detailed overview of the law of consumer credit; it is merely intended to highlight those areas which may be of concern to banks as providers of credit.

The Requirement for Permission

4.19  A person who, in the course of a business, provides credit by means of regulated credit agreements or is otherwise entitled to exercise the lender’s rights will require FCA permission for that purpose,33 unless all of his business consists of exempt agreements.

4.20  It may be noted that EEA institutions which are ‘passported’ into the United Kingdom34 do not require an FCA permission for this purpose, since questions of authorization are a matter for the home State regulator, rather than the FCA.35 However, this does not exempt such institutions from the need to comply with the documentary and other formalities discussed below.

4.21  It should be noted in passing that the permissions regime created by the Regulated Activities Order is not limited to the provision of credit. Indeed, the categories business now covered by the 1974 Act include:36

  1. (a)  consumer credit;37

  2. (b)  consumer hire;38

  3. (c)  credit brokerage;39

  4. (d)  debt adjusting;40

  5. (e)  debt counselling;41

  6. (f)  debt collection;42

  7. (p. 64) (g)  debt administration;43 and

  8. (h)  credit information services.44

4.22  It will, however, be apparent that banks will be most concerned with the first category of business, namely, consumer credit, and the present chapter is accordingly confined to that category.

4.23  As noted earlier, the licensing system is now operated by the FCA in accordance with the terms of the Regulated Activities Order and the FCA Handbook. The result is that the FCA’s general rules on applications for permissions and the decision to grant or to refuse such permissions will apply equally in the case of an application for a consumer credit permission.


4.24  Prior to the transfer of consumer credit functions to the FCA, the advertisement of consumer credit facilities was largely governed by Part IV of the Consumer Credit Act 1974 and a series of statutory instruments made under it. However, following the transfer, such activities amount to ‘financial promotions’.45 The FCA’s new Consumer Credit Sourcebook (CONC) accordingly now deals with promotions of this type of credit. Briefly, the main rules are as follows:

  1. (a)  as an overarching requirement, the promotion must be clear, fair and not misleading;46

  2. (b)  a financial promotion for consumer credit must use plain and intelligible language, be legible (or audible) and must provide the name of the advertiser;47

  3. (c)  a promotion for short term, high cost credit must include prescribed risk warnings;48

  4. (d)  where the credit is secured on land, the promotion must give details of any required security and, where that includes a charge over the debtor’s home, must include a clear statement that the home may be repossessed in the event of a default, and other warnings about the need to think carefully before debts are secured in this way;49

  5. (e)  a financial promotion relating to credit not secured on land must include the total charge for credit and a representative example setting out the amounts payable by the debtor and other details.50

4.25  It may also be noted that it is an offence to canvass for debtor–creditor business off trade premises51 or to send a circular to a person under the age of 18 inviting him to borrow money or to obtain credit.52

(p. 65) Contents of Agreements and Formalities

4.26  The 1974 Act deals with the content, formalities and other matters that must be observed in connection with a regulated consumer credit agreement.

4.27  These content requirements are of some importance because a term of the agreement which is inconsistent with a debtor protection requirement of the 1974 Act will be void.53

4.28  In similar vein—and more importantly from the perspective of the lender—a failure to meet certain requirements54 will mean that the contract is ‘improperly executed’ with the result that the contract is only enforceable with a court order to that effect.55 The list of prescribed requirements for a regulated consumer credit agreement56 includes, amongst other things, (i) details of the interest rate expressed as an annual percentage rate (APR), (ii) details of the borrower’s cancellation rights, and (iii) a statement as to how the debtor is to discharge his obligations. These items must be clearly set out by way of express term, and an implied term of the contract is not sufficient for these purposes.57

4.29  In a broader sense, a variety of requirements are applied to a regulated consumer credit agreement. For example:

  1. (a)  The Consumer Credit (Disclosure of Information) Regulations 201058 require the disclosure of certain pre-contract information, and a failure to comply with those regulations will mean that the agreement is ‘improperly executed’. In essence, the lender must provide, in a clear and separate document headed ‘Pre-contract credit information’59 details of certain statutory protections and remedies available to the debtor.60

  2. (b)  An agreement must state the total charge for credit,61 and the omission of any relevant items will render the contract unenforceable.62

  3. (p. 66) (c)  A regulated agreement will generally be cancellable by the debtor.63

  4. (d)  A copy of the agreement must be provided to the debtor64 and a ‘cooling off’ period applies thereafter during which the debtor has the right to cancel the agreement.65 Where credit has been extended or funds advanced before the debtor exercises his cancellation option, then the agreement remains effective for the repayment of principal and interest. However, no interest is payable if the debtor repays the principal within 30 days.66

4.30  In terms of the contents of the regulated agreement itself, the document will not be properly executed—and, hence, will be unenforceable except with the consent of the court—unless it complies with a series of detailed requirements, including:

  1. (a)  Where the agreement is cancellable, it must contain information about the debtor’s right of cancellation and various other matters. The precise nature of the required information varies according to the type of agreement involved67 but, in relation to facilities provided by banks, this will include matters such as the amount and duration of the credit, timing and amounts of repayment, the applicable interest rate, the total amount payable by the debtor in respect of the credit default charges, and other matters.68

  2. (b)  The agreement must set out all the express terms of the contract.69

  3. (c)  The document presented to the debtor for signature must be clearly legible.70

  4. (d)  Copies of the document must be made available to the debtor.71

4.31  It will thus be apparent that the consequences of non-compliance with the 1974 Act in this area may be quite draconian for the creditor, in that he may forego the right to recover payment of any monies owing to him,72 and may lose his security. However, it has been recognized that this reflects the policy of the 1974 Act and that these rules are not (p. 67) inconsistent with the property rights which are guaranteed by the European Convention on Human Rights.73

Matters Arising during the Currency of the Contract

4.32  Part IV of the 1974 Act deals with various issues which may arise while a credit agreement remains in force.

4.33  The section which has attracted most judicial (and market) attention in recent times is section 75. Section 75(1) provides that:

If the debtor under a debtor-creditor-supplier agreement falling within section 12(b) or 12(c) has, in relation to a transaction financed by the agreement, any claim against the supplier in respect of a misrepresentation or breach of contract, he shall have a like claim against the creditor, who, with the supplier, shall be jointly and severally liable to the debtor.

4.34  Sections 12(b) and 12(c) respectively refer to restricted and unrestricted use debtor–creditor– supplier agreements where there are pre-existing arrangements between the creditor and the supplier. The rationale for this provision—as put forward in the Crowther Report74—was that a lender who provided credit to enable third parties to acquire goods from a particular supplier is connected with that supplier and should be equally liable for a contravention of the main commercial contract.

4.35  The remainder of section 75 deals with various ancillary matters. For example, the creditor is entitled to an indemnity from the supplier in respect of any amount for which the creditor is made liable under section 75(1),75 and it is confirmed that the creditor can be liable to the debtor under section 75(1) even though the debtor may have exceeded his credit limit or is otherwise in breach of his agreement with the creditor.76 But, for present purposes, the discussion may focus essentially on section 75(1) itself.

4.36  It is now established that a bank which issues a credit card has a sufficiently close relationship with suppliers who have contracted to accept cards within the scheme and, as a result, there are sufficient ‘arrangements’ between them to create a debtor–creditor–supplier agreement77 within section 12(b) or (c) of the 1974 Act, so that the potential liability of the creditor under section 75(1) may in principle be engaged.78 This will be so because both the bank and the supplier are participants in the ‘umbrella’ credit card scheme, even though they may be wholly unknown to each other. As a result, the issuing bank is potentially liable to its cardholder in respect of a claim which the cardholder has against the supplier under the commercial contract concerned. Given that the liability is ‘joint and several’ with that of the supplier, there is no requirement for the cardholder to proceed against the supplier before it asserts its claim against the issuing bank. All of this would be reasonably clear but the waters have in some respects been muddied by the introduction of a new section 75A in to the (p. 68) 1974 Act.79 Under the terms of that section, the card issuer may be made liable for a claim against the supplier under a linked agreement where there has been a non-delivery or partial delivery of the goods or services, or they do not conform to their contractual description. However, the new liability under section 75A is secondary, in the sense that the debtor can only assert this claim against the creditor ‘…if the debtor has pursued his remedies against the supplier, which may but does not have to include taking legal proceedings against the supplier, and has failed to obtain the satisfaction to which he is entitled…’. The relationship between these two sections is not entirely clear. Non-delivery of goods and delivery of non-conforming goods will fall within section 75A, but they will also presumably constitute a ‘…breach of contract…’ for the purposes of section 75 itself. Given that section 75 involves primary recourse to the creditor without any need for the time and expense involved in pursuing the suppler, it may be assumed that consumers will prefer to bring their claim under section 75, as opposed to section 75A.

4.37  It was for some time uncertain whether the issuing bank could potentially be liable under section 75(1) in respect of transactions executed outside the United Kingdom—it was argued that the section was not ‘extra-territorial’ in that sense. Apart from the general presumption against the extra-territorial effect of legislation, section 75(1) refers to a claim for ‘misrepresentation or breach of contract’ suggesting a contract made in England or governed by English law. However, in Office of Fair Trading v Lloyds TSB Bank plc80 the House of Lords held that the only territorial nexus required for the operation of section 75 was that the credit card agreement itself should be governed by the law of some part of the United Kingdom. The issuing bank could thus be liable under that section even though the underlying supply contract was entered into abroad, expressed in a foreign currency and governed by foreign law. The difficulty is that the issuing bank’s statutory right to an indemnity under section 75(2)81 could not be effective against suppliers outside the United Kingdom.82 However, a corresponding indemnity could presumably be included as an express contractual term in the overall credit card scheme agreements. Nevertheless, and even though the underlying contract will have been entered into abroad and will relate to foreign goods or services, the English court will always have jurisdiction to make an order against a UK issuing bank since the claim arises from the debtor–creditor–supplier agreement, and not from the purchase contract.83

4.38  It may be noted that the creditor may also incur liability for statements made by the supplier during ‘antecedent negotiations’ with the debtor in the context of certain debtor–creditor–supplier agreements.84 In addition, if the buyer/borrower rescinds the underlying supply agreement on the basis that the goods do not conform to the contractual description, then section 75 of the Consumer Credit Act correspondingly allows them to rescind the related consumer credit agreement.85

(p. 69) 4.39  Finally, it may be noted that various formalities may have to be met before the creditor can take steps to enforce its rights under a regulated agreement. For example, the creditor must give notice to the debtor in relation to any arrears which have arisen86 and will generally be required to give seven days’ notice before demanding payment or enforcing a regulated agreement.87 The lender is also required to provide a copy of the agreement to the debtor on request, together with details of sums paid and payable, and the agreement may not be enforced during any period of default by the lender in respect of its obligations under this provision.88 A mortgage over land which has been given by way of security for a regulated agreement can only be enforced by means of a court order.89

Court’s Powers of Intervention

4.40  The court has power to reopen the terms of a consumer credit agreement where the relationship between the parties is unfair to the debtor.90 An agreement may be ‘unfair’ to the debtor on account of any one or more of the following factors:

  1. (a)  any of the terms of the credit agreement itself or any related agreement;91

  2. (b)  the way in which the creditor has exercised or enforced any of its rights under the credit agreement or any related agreement;92 or

  3. (c)  any other act or omission of the creditor (whether occurring before or after the contract was made).

4.41  In recent times, a series of cases have arisen in which a loan broker has made representations to the prospective borrower as to the need to take out payment protection insurance (PPI) as a part of the loan transaction. In Harrison v Black Horse Ltd,93 the borrowers sought to establish an ‘unfair relationship’ with the lender on the basis that the broker had failed to disclose the large commission that he would earn from the PPI sale. At the relevant time, there was no regulatory obligation to disclose such commissions and, on that basis, the court felt unable to hold that non-disclosure created an unfair relationship. The decision (p. 70) was followed with notable reluctance on a later occasion, but has now been discarded.94 However, in Scotland v British Credit Trust Ltd,95 it was held that a misrepresentation made by a credit broker as to the need for PPI as a condition to the loan was sufficient to create an ‘unfair relationship’ for the purposes of section 140A of the 1974 Act. This followed in part from the fact that regulations dealing with the sale of such products96 had now developed and required disclosure of commissions.97 This decision obviously places a lender in a difficult position in the context of lending business that is introduced through intermediaries in this fashion, for it cannot know or control the scope of any representations that the broker may have made. Lenders may, however, draw some comfort from the decision in Graves v Capital Home Loans Ltd,98 where the court found that a lender would not normally be found to have acted unfairly for these purposes if, after an extended period of default and broken promises to remedy arrears, it took action to enforce its security.

4.42  It may be noted, finally, that an onerous penalty clause may also create an unfair relationship for section 140A purposes. In one case, this led the court to absolve the debtor from all future obligations under the instalment payment agreement at issue.99 Some care is thus required in using penalty clauses of this kind in consumer credit agreements; they may not merely be unenforceable in themselves, but they may render the entire contract unenforceable as well.

4.43  It will be seen that these provisions allow the court a wide power of intervention.100 Where a court holds the contract to be unfair, it has a range of powers available to it to redress the balance, including a power to make orders for the repayment of amounts transferred by the debtor, and the alteration of the terms of the contract.

The Consumer Credit Directive

4.44  The Consumer Credit Directive101 was adopted by the European Commission in May 2008, and Member States were required to transpose the Directive into national law by June 2010.102 Since certain aspects of the Directive already form a part of the law of the United Kingdom under existing legislation, it has not been appropriate to adopt a ‘copy out’ approach to the domestic implementation of the Directive. Instead, existing rules have to be refined and amended to bring them into line with the new Directive or, in a number of cases, existing provisions in the Consumer Credit Act 1974 or secondary legislation (p. 71) were found to be consistent with the requirements of the Directive. The Consumer Credit (EU Directive) Regulations 2010103 are designed to give effect to the Directive, to the extent to which the UK was required to do so in the light of its pre-existing legislation in this sphere.104

4.45  There is inevitably a mismatch between the scope of the existing UK legislation and the terms of the new Directive itself. For example:

  1. (a)  loans to small traders are excluded from the Directive,105 whilst, as has already been seen, certain business loans below £25,000 are regulated under the provisions of the 1974 Act;106

  2. (b)  loans below €200 and above €75,000 are outside the scope of the Directive107 whilst, as already noted, the 1974 Act now generally applies to consumer loans without any pre-set financial limit;108 and

  3. (c)  interest-free credit arrangements are outside the scope of the Directive,109 whilst they are within the scope of the 1974 Act.

4.46  The key amendments to the existing UK regime110 include the following:

  1. (a)  The ‘high net worth’ exemption111 required amendment so that it applies only to loans above €75,000.112

  2. (b)  The Directive prescribes a list of information which must be given to the debtor in good time before he becomes bound by the contract.113 The information must be provided in the form of a Standard European Consumer Credit Information Sheet (SECCI). This replaced the existing requirements under the Consumer Credit (Disclosure of Information) Regulations 2004,114 although the list of required information (eg details of the creditor, amount and type of credit, total (p. 72) amount payable, interest rate and charges, and similar matters) is broadly similar in each case.115

  3. (c)  As noted above,116 the Consumer Credit (Agreements) Regulations 1983 make certain rules about the form and content of regulated agreements. The Directive now requires the provision of certain additional information within the agreement itself, including, (i) the debtor’s right to request an amortization table, (ii) statements as to periods and conditions for the payment of interest, and (iii) termination procedures.117

  4. (d)  Lenders are required to provide ‘adequate explanations’ to the borrower to enable them to determine whether the loan meets his needs and is suited to his financial position.118

  5. (e)  Lenders are required to assess the creditworthiness of the borrower.119

  6. (f)  Where a credit agreement falls within the scope of the Directive, the debtor must have a right of cancellation within 14 days of the agreement or the date on which he receives a copy of the applicable terms and conditions.120 This is wider than the cancellation right available under the current UK regime, which applies only to limited types of contract.121 Where the debtor exercises his right of cancellation, he must repay the capital and accrued interest within 30 days.122

  7. (g)  Borrowers must have the right to make partial prepayments of the credit.123

  8. (h)  Reference has been made above124 to the calculation of the annual percentage rate (or APR). The details of this calculation have changed, although the revisions do not appear to be material.125

  9. (i)  The Directive involved significant amendments to the consumer credit advertising regime.126 In particular, interest rates, charges, and other items must be specified in a (p. 73) clear, concise and prominent means by way of a representative example.127 Lenders must generally provide that example by reference to a credit value of €1,500. The stated terms must be as good as, or better than, at least 50 per cent of borrowers would receive.128 The APR must be based on the representative example.129

  10. (j)  The Directive also contains new provisions dealing with authorized and unauthorized overdrafts.130 The customer must be provided with details of his credit limit, interest rates and charges.131 Regular statements of account must be provided.132 Where the overdraft is unauthorized, the customer must be notified if he has exceeded his credit limit by more than £100 for a period of a month, and must be advised of the applicable interest rates, charges, and penalties.133

  11. (k)  The Directive requires the creditor to accept responsibility for breaches of contract by the supplier under any linked commercial agreement.134

  12. (l)  Finally, Part II of Annex 2 to the Directive includes the assumptions on which the APR quotation was to be calculated. This was found to be unsatisfactory, and an amending directive was introduced to prescribe a revised set of assumptions for these purposes.135

Mortgage Regulation


4.47  Residential mortgages or home finance transactions were not originally within the scope of the FSA regulatory structure. However, this changed with effect from 31 October 2004, when certain mortgage-related activities were brought within the scope of supervision.

The Scope of Regulation

4.48  Paragraph 23 of Schedule 2 to the FSMA (as amended) brings within the scope of regulation rights under any contract where credit is provided on the security of land. In considering home finance and mortgage transactions, one is instinctively inclined to think of traditional facilities designed to assist an individual to purchase his residence, or to refinance such an arrangement. But, as others have pointed out,136 the expression ‘credit’ is widely defined by paragraph 23 to include any form of financial accommodation. Thus, if a bank issues a guarantee secured on property belonging to its customer, this could potentially be a regulated mortgage contract because the issue of the guarantee is a form of financial accommodation.

(p. 74) 4.49  In practice, however, the scope of regulation is cut back by various features of the definition of a ‘regulated mortgage contract’ for the purposes of the Regulated Activities Order. Article 61 of that Order defines such a contract as a credit arrangement secured on land where:

  1. (a)  the borrower is an individual (or a trustee for an individual);

  2. (b)  the lender carries on its activities by way of business;137

  3. (c)  the credit is secured on land in the United Kingdom;138

  4. (d)  the borrower (or a close relative or partner) intends to use at least 40 per cent of the land as a dwelling, or in connection with a dwelling.

4.50  Various features of these criteria may be noted. For example:

  1. (a)  the requirement that the borrower must be an individual—or a trustee for an individual—excludes corporate loans from the scope of regulation, even if secured on the borrower’s real estate;

  2. (b)  there is no positive requirement that the loan must be made for the purpose of purchasing or refinancing the purchase of the residential property which forms the subject matter of the security. Consequently, a loan made to an individual for the purposes of his business may be a regulated mortgage contract for these purposes if it is secured on his residence;139

  3. (c)  loans to purchase a farm will not, in the ordinary course, be regulated mortgage contracts since (i) less than 40 per cent of the land will be used as a dwelling and (ii) the remainder of the land is not used in connection with the dwelling, but as an independent business;140 and

  4. (d)  a loan to purchase a property for investment purposes will not be a regulated mortgage contract since it will not be used as a dwelling for the borrower himself.141

4.51  Since mortgage contracts fall within the scope of the Regulated Activities Order, the following activities—if carried on by way of business—will be ‘regulated activities’ for the purposes of the FSMA and will thus be subject to the requirement for authorization by the FSA:

  1. (a)  arranging,142 making arrangements with a view to,143 or advising on144 a regulated mortgage contract;145

  2. (b)  entering into a regulated mortgage contract as a lender;146

  3. (p. 75) (c)  administering a regulated mortgage contract;147 and

  4. (d)  agreeing to carry out any of the above activities.148

4.52  In terms of its FSA permissions, the upshot is that a bank will generally need authorization to act as a mortgage lender.149

4.53  It may be noted that the regulatory regime applicable to home finance has been further extended in two other respects in order to cater for other developments in the market. In each case, the products concerned involve an outright transfer of the land to the financier, as opposed to a loan secured by a mortgage. In the absence of the essential feature of security, these products fall outside the definition of a regulated mortgage contract.

4.54  The first product is the ‘regulated home reversion plan’.150 This involves the purchase of the property by a financier, coupled with a right for the customer to live in the property until death or until other conditions are met. These products allow individuals to remain in their own homes whilst at the same time realizing a capital sum for retirement purposes. Since products of this kind are not generally sold by banks, it is not proposed to consider them further.

4.55  Secondly, it was necessary to take account of the growing market for Shariah-compliant mortgage products. The nature of these products will be discussed at a later stage.151 It should be said at the outset that some of these contracts would fall within the definition of a regulated mortgage contract. For example, under a murabaha agreement, the bank buys the property itself and then re-sells it to the customer on deferred terms, with the benefit of a charge over the property to secure the later instalments. But other products—such as the ijara lease and the diminishing musharaka—involve the ownership of the property by the bank itself throughout the period of the financing, with the result that no mortgage can be taken from the customer. Such arrangements have now been brought within the scope of regulation as ‘regulated home purchase plans’.152 Once again, however, such arrangements are only regulated if they relate to an interest in land in the United Kingdom and the customer intends to occupy at least 40 per cent of the property as a dwelling, or a close relative intends to do so. The intention of these provisions is plain—conventional and Shariah-compliant home finance should be regulated on an essentially identical basis, with similar protection being applied to both types of product. A bank which provides Shariah-compliant mortgage products will thus be regulated on the same basis as if it were a conventional provider.

The Nature of the Regulation

4.56  Having determined the types of the mortgage/home purchase products which fall within the scope of regulation, it is now necessary to consider the nature and effect of the protection conferred on the users of those products.

(p. 76) 4.57  There are a number of requirements derived from various sources:

  1. (a)  a mortgage lender must not use or propose the use of any relevant intermediary unless that person is himself authorized or exempt for that purpose under the FSMA regulatory regime.153 The intention is to ensure that the borrower benefits from appropriate regulatory protection at all relevant stages of the transaction, and does not forfeit that protection as a result of the use of unauthorized intermediaries;154 and

  2. (b)  a firm which engages in mortgage lending must meet a solvency requirement155 and it must maintain its capital resources in excess of stated minimum requirements.156 However, it is unnecessary to consider this point further in the present context because these particular requirements are not applicable to banks.157

4.58  More detailed conduct of business requirements are contained in the MCOB chapter of the FSA Handbook. It may suffice to note a few brief points:

  1. (a)  as noted above, a contract will normally fall within the scope of regulation if at least 40 per cent of the property is to be used as a dwelling. But the only further requirement is that the loan should be secured on such a dwelling, and there is no requirement to the effect that the loan should be used for the purpose of acquiring the property or refinancing its original acquisition. Consequently, a loan made for business purposes158 may amount to a regulated mortgage contract if it is secured on the main residence of a director or shareholder and he intends to use the proceeds for the purposes of that business. Recognizing this fact, MCOB makes special provision for loans falling within this particular category;

  2. (b)  first of all, MCOB applies if the customer is not a ‘large business customer’. The definition of that expression159 means that MCOB only applies if the turnover of the business concerned is less than £1 million;

  3. (c)  if a business loan falls within the scope of MCOB on the basis that it is made to a business with an annual turnover of less than £1 million and is secured on a dwelling which meets the 40 per cent occupancy requirement, then the bank has a choice of regulatory approaches. As an initial option, it can simply comply with MCOB in full in any event. This may often be the most convenient approach because—although the full application of MCOB is in many ways more onerous—it may well be more straightforward for the bank to apply a single set of harmonized procedures to all of its mortgage loans, regardless of their purpose. The second alternative open to the bank is to adopt a so-called ‘tailored approach’ which disapplies some of the MCOB rules (p. 77) to business loans, although certain further conditions will apply in order to qualify for that approach;160

  4. (d)  if MCOB applies, then the bank must adopt various business standards and requirements. Apart from the general rule that all financial promotions intended to solicit regulated mortgage business must be clear, fair, and not misleading,161 the bank is required to make certain points clear to the customer by the use of prescribed expressions, such as ‘early repayment charge’, ‘higher lending charge’ and it cannot use other expressions whose meaning may be less clear to the customer;162

  5. (e)  MCOB also makes detailed rules as to the content of financial promotions for regulated mortgage contracts;163

  6. (f)  MCOB also requires a lender to deal fairly with customers in difficulty and to take reasonable steps to reach an agreement over the payment of arrears.164 However, once those efforts have proved to be fruitless, the lender may exercise his usual rights as a mortgagee, including an application for the possession of the property with a view to its sale.165

The Mortgage Credit Directive

4.59  The EU’s Mortgage Credit Directive166 will add a further layer of complexity to this area. Member States are required to implement the Directive into their respective national legal systems by 21 March 2016.167

4.60  As was the case in the context of the Consumer Credit Directive168 the new directive creates a number of requirements that are already reflected in the UK’s regulatory framework for this type of product. Nevertheless, it may be helpful briefly to summarize the main provisions, as follows:

  1. (a)  the Directive applies to loans made available to consumers and secured on a residential property.169 It can apply equally to investment or ‘buy to let’ properties, although Member States have an individual discretion not to apply the Directive to transactions of that kind;170

  2. (p. 78) (b)  Member States must ensure that creditors and credit brokers act fairly and honestly and take into account the interests of consumers in providing or advising on mortgage products. Policies for the remuneration of staff must not impede this objective, and staff must be provided with appropriate training;171

  3. (c)  advertising must be clear, fair, and not misleading and must include information about the cost of borrowing and other matters;172

  4. (d)  the lender must assess the creditworthiness of the borrower and the suitability of the product for his needs;173

  5. (e)  mortgage lenders that are not credit institutions must be brought within the scope of regulation and subject to appropriate regimes of authorization and supervision.174

The Lending Code

4.61  One of the relatively few remaining strands of voluntary or self-regulation in the financial services sphere is offered by The Lending Code (the Code).

4.62  The current version of the Code was published in March 2011175 and was sponsored by the British Bankers’ Association, the Building Societies Association, and the UK Cards Association. It applies to loans, current account overdrafts and credit or charge cards provided to consumers, micro-enterprises and charities with an annual income of less than £1 million. The Code does not apply to residential mortgages and certain other types of business.176 The Code applies to facilities in sterling, but lenders may extend its terms to other currencies on a voluntary basis.177

4.63  Compliance with the Code is monitored by the Lending Standards Board,178 but the Code obviously does not affect the requirement for lenders to comply with other applicable legislation such as the Consumer Credit Acts and the Payment Services Regulations 2009.179

4.64  The core commitment offered by institutions which subscribe to the Code is to act fairly and reasonably in their dealings with customers. This commitment involves duties on the part of the bank (i) to ensure that promotional material is fair, clear and not misleading, and to give customers clear information, (ii) to give clear information about accounts and services, terms and conditions, and interest rates, (iii) to provide regular statements and information about changes to interest rates, charges, and other conditions, (iv) to lend (p. 79) money responsibly, (v) to deal sympathetically and positively with customers in financial difficulties, (vi) to treat customer information as confidential and to provide secure and reliable banking systems, and (vii) to ensure that staff are trained to put the Code into practice.180

4.65  The provisions of the Code are relatively detailed and a brief overview must suffice for present purposes:

  1. (a)  Section 2 of the Code repeats the requirement that communications should be clear, fair, and not misleading and that customers should be provided with appropriate information at the right time to enable them to make informed decisions.181 That section then includes a number of rules designed to amplify these obligations and to deal with marketing and advertising issues;

  2. (b)  Section 3 deals with the transmission of information to Credit Reference Agencies. This obviously has confidentiality/privacy implications for the customer and the Code provides that information can only be passed to such an agency if the customer is in arrears, has not disputed the amount owing, and has not made an acceptable proposal for repayment following the lender’s demand;182

  3. (c)  Section 4 of the Code requires lenders to make a credit assessment before granting or increasing an overdraft or other loan facility, in order to determine whether the customer will be able to repay it.183 This exercise is obviously in the interests of the bank itself, but it also represents a part of the core commitment to responsible lending;

  4. (d)  Sections 5, 6, and 7 respectively contain provisions dealing with current account overdrafts, credit cards, and loans. As might be expected, these contain a series of provisions about the need to convey certain information to customers about interest rates, charges, and other conditions. Section 7 also contains guidance on personal guarantees and suggests that lenders should not generally take an unlimited guarantee from a private individual;184

  5. (e)  Section 8 requires that the terms and conditions of any product should be written in clear and intelligible language, and deals with the processes involved in varying those terms and conditions;

  6. (f)  Section 9 deals with financial difficulties, and expands on the core commitment to adopt a positive and sympathetic approach to customers in this situation. Nevertheless, debt recovery procedures may be instituted if the customer does not cooperate or if his suggested repayment programme is unreasonable in all the circumstances;185 and

  7. (g)  Sections 10 and 11 deal with complaints and compliance monitoring.

4.66  As noted above, the Code is observed by subscribing institutions on a voluntary or self-regulatory basis. It may apply alongside statutory forms of regulation which are applicable in the particular circumstances of a given case.(p. 80)


It should be appreciated that the whole subject of consumer credit is a highly detailed and technical field. The present discussion is only intended to provide an overview of this complex topic and, in particular, is limited to those areas likely to be of interest to banks (as opposed to others who may be involved in various aspects of the consumer credit business). Detailed consideration of the finer points will be found in the well-known texts, including Goode, Consumer Credit Law and Practice (LexisNexis, looseleaf) and Guest and Lloyds, Encyclopaedia of Consumer Credit Law (Thomson Reuters, looseleaf).

For a hybrid case, see n 20 below.

Cmnd 4596.

The 2006 Act gave effect to an EC Directive on Consumer Credit: Council Directive (EC) No 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning Consumer Credit, OJ L 042, 12.2.1987, p 48, as amended by Council Directive 90/88/EEC of 22 February 1990, OJ L 061, 10.3.1990, p 14 and Council Directive 98/7/EC of 16 February 1998, OJ L 101, 01.4.1998, p 17.

Consumer Credit (Increase of Monetary Limits) (Amendment) Order 1998 (SI 1998/996).

See the discussion at para 4.14(e) below. The £25,000 limit will, of course, continue to apply to agreements entered into before the 2006 Act was brought into force, and remains applicable to certain business loans (see para 4.12 below).

In the context of the 1974 Act itself, see Wills v Wood [1984] CCLR 7. A single or ‘one-off’ loan was held not to fall within the scope of the 1974 Act: Hare v Schurek [1993] CCLR 47 (CA); Bassano v Toft [2014] Bus LR D9, [2014] EWHC 377 (QB). This ruling may be of uncertain value now that regulation of consumer credit falls within the scope of the FSMA and the Regulated Activities Order, since s 19 of the FSMA has a separate ‘business’ test: see the discussion at paras 1.16–1.18 above.

This was achieved through the Financial Services and Markets Act 2012 (Consumer Credit) Order 2013 (SI 2013/1882), and by a further order amending the Regulated Activities Order. For the enabling power in relation to consumer credit, see s 116 of the Financial Services Act 2012.

On the whole subject, see ‘A new approach to financial regulation: transferring consumer credit regulation to the Financial Conduct Authority’ (HM Treasury, March 2013).

10  CONC 2.2.

11  CONC 3.

12  CONC 4 and CONC 6.

13  CONC 5.

14  CONC 7.

15  It should be noted that the definition involves an ‘agreement’ for the provision of credit. As will be seen elsewhere (see the discussion of the decision in Barclays Bank Ltd v W J Simms Son & Cook (Southern) Ltd [1980] QB 677 at para 17.35 below), the drawing of a cheque on a current account may imply a request for, and an agreement to allow, an overdraft facility to the extent which may be necessary to meet that cheque, and such an arrangement may therefore amount to a ‘regulated agreement’. However, where the amounts involved are relatively small and the cheque is simply processed by the bank’s systems without human intervention, the drawing of the cheque is probably a breach of the current account agreement, rather than a fresh agreement to provide credit: see examples 17–21 given in Sch 2 to the 1974 Act.

16  The expression ‘credit’ involves any form of financial accommodation—see s 9 of the 1974 Act. This will obviously include loans, overdraft, credit card and similar facilities. Although the definition is broad, the expression ‘credit’ necessarily connotes an arrangement under which the amount advanced will definitely be repayable. For a case in which this condition was not met, see Nejad v City Index Ltd [2001] GCCR 2461 (CA), and see also McMillan Williams v Range [2004] GCCR 5041. ‘Credit’ may also be extended if the creditor allows the debtor time to pay pending the outcome of litigation, even though the relevant amounts would otherwise be immediately payable. This is the effect of the House of Lords decision in Dimond v Lovell [2002] 1 AC 384. The provision of credit must be made by agreement and, consequently, a unilateral delay in payment by the debtor without the consent of the creditor does not engage the terms of the 1974 Act. For a recent judicial consideration of the meaning of the expression ‘credit’ in this context, see Maple Leaf Macro Volatility Master Fund v Rouvroy [2009] All ER (D) 247, aff’d without reference to this point, [2009] All ER(D) 199 (Nov). Of course, in a banking context, this particular point is unlikely to be controversial, since the main purpose of the institution’s business is the provision of credit. Nevertheless, there may be the occasional, marginal case. For example, if an institution enters into a sale and leaseback arrangement, this may have the effect of providing a capital sum to the customer but this is achieved by means of providing an asset to the customer in return for a rental stream. Such an arrangement does not involve the provision of ‘credit’ and the arrangements are therefore outside the scope of the 1974 Act: see Lavin v Johnson [2002] All ER (D) 501 (Jul); [2002] EWCA Civ 1138, applying the decision of the Court of Appeal in Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148. This reflects the general reluctance of the English courts to recharacterize transactions because they recognize that parties have a choice as to the structure of their transaction and this should generally be respected: see the observations made in Wire TV Ltd v Cable Tel Ltd [1988] CLC 244, at 258. For a similar discussion in the context of security arrangements, see paras 27.04–27.07 below.

17  That is to say, a natural, as opposed to a corporate, person.

18  Items (ii) and (iii) are derived from the definition of ‘relevant recipient of credit’ in Art 60L of the Regulated Activities Order. Note that partnerships of more than three persons fall outside the ‘credit agreement’ definition and, hence, outside the scope of regulation.

19  See the discussion at paras 4.43–4.54 below.

20  A statement in the loan contract to the effect that the loan is for business purposes may be relied on by the lender, provided that certain documentary formalities are met and the lender has no grounds to believe that the statement is untrue: see Art 60C(5) and (6). For the required content of the statement, see FCA Handbook, CONC, Appendix 1.4.

21  It may be noted that neither the FSMA nor the Regulated Activities Order defines ‘land’ for these purposes. Section 189 of the Consumer Credit Act 1974 defines the expression to ‘include any interest in land, and in relation to Scotland, includes heritable subjects of any description’. The definition does not state, in terms, whether it includes or excludes land outside the United Kingdom. However, it is submitted that there would be no justification for applying consumer credit legislation to a loan for the purchase of foreign land where an equivalent facility secured on land in this country would be exempt. The exemption should therefore be available for loans secured on foreign land, provided that (i) the 40 per cent condition is met and (ii) the lender takes a security interest under the local law that is equivalent to a legal or equitable mortgage.

22  Article 60E(3) of the Regulated Activities Order and FCA Handbook, CONC, Appendix 1.3.

23  The agreement must comply with detailed rules made by the FCA.

24  For the details, see FCA Handbook, CONC, Appendix 1.4.

25  Section 10(1)(a) of the 1974 Act.

26  When it was responsible for the consumer credit regime, the OFT issued a determination under s 74(1)(b) of the 1974 Act which disapplied the cancellation and documentation rules in Pt V of the 1974 Act provided that the lender had notified the OFT that it engages in business of this type and prescribed information has been provided to the debtor. On the application of the determination, see Coutts & Co v Sebestyen [2005] EWCA Civ 473 (CA). Overdraft arrangements are now in certain respects governed by the Consumer Credit (Agreements) Regulations 2010 (SI 2010/1014).

27  Section 10(1)(b) of the 1974 Act.

28  Section 11 of the 1974 Act. An agreement is only a ‘restricted use’ credit agreement under the ‘refinancing’ heading if the contract explicitly so states: see National Westminster Bank plc v Storey & Pallister [2002] GCCR 2381.

29  See s 12 of the 1974 Act.

30  Section 13(a) of the 1974 Act. A loan made by the customer’s own bank to assist in the purchase of a vehicle would fall into this category.

31  See the discussion at para 4.30 below. It should be noted that this position is varied in some respects as a result of the Consumer Credit Directive: see para 4.47 below.

32  See the discussion of s 75 of the 1974 Act and the Lloyds Bank case at paras 4.33–4.40 below. For a case in which some of the characterizations were considered, see Goshawk Dedicated (No 2) Ltd v Governor and Company of Bank of Scotland [2006] 2 All ER 610; [2005] EWHC 2906 Ch.

33  FSMA, s 19 read together with Art 60B of the Regulated Activities Order.

34  On the passporting process, see paras 2.14–2.16 above.

35  On this point, see FSMA, Sch 3, para 15.

36  For the most recent additions, see s 24A(1) of the 1974 Act.

37  See Art 60B of the Regulated Activities Order.

38  See Art 60N of the Regulated Activities Order.

39  See Art 36A of the Regulated Activities Order.

40  See Art 39D of the Regulated Activities Order.

41  See Art 39E of the Regulated Activities Order. For guidance on the scope of this activity, see FCA Handbook, Perimeter Guidance Manual (PERG) 17.

42  See Art 39F of the Regulated Activities Order.

43  See Art 39G of the Regulated Activities Order.

44  See Art 89A of the Regulated Activities Order.

45  See the financial promotion restriction in FSMA, s 21.

46  FCA Handbook, CONC 3.3.1R. Guidance on the ‘clear, fair and not misleading’ requirement, and examples of conduct that may contravene the requirement, is set out in CONC 3.3.3G.

47  FCA Handbook, CONC 3.2.2R.

48  FCA Handbook, CONC 3.4.1R.

49  FCA Handbook, CONC 3.6.

50  FCA Handbook, CONC 3.5

51  Section 49 of the 1974 Act.

52  Section 50 of the 1974 Act, on which see Alliance and Leicester Building Society v Babbs [1999] GCCR 1657.

53  Section 173 of the 1974 Act. A provision is inconsistent with the 1974 Act if it seeks to impose additional duties on the debtor beyond those contemplated by the legislative framework: see s 173(2) of the 1974 Act. Contracting out of the terms of the 1974 Act is thus effectively prohibited.

54  Under s 61 of the 1974 Act, an agreement is not properly executed unless it follows prescribed forms and contains all the terms of the agreement in legible form. The agreement will also not be properly executed if the creditor approaches the debtor at any time during a cancellation period (ie with a view to influencing the debtor’s decision in that respect): see s 61(2)(c) of the 1974 Act. It may be noted that similar rules apply to any security given in respect of a regulated agreement, in the sense that prescribed information must be given to chargor and, failing that, the security will only be enforceable with the aid of a court order: see ss 105 and 106 of the 1974 Act. ‘Security’ has a broad meaning for these purposes and includes a guarantee given by a third party. In such a case, the guarantor is entitled to a copy of the credit documentation and to receive details of the amounts owing from time to time: see ss 107–111 of the 1974 Act.

55  On these consequences of an ‘improperly executed’ agreement, see s 65 of the 1974 Act.

56  See Art 2, read together with Sch 1 to the Consumer Credit (Agreements) Regulations 1983, as amended.

57  On this point, and for a case in which a consumer credit agreement was held to be unenforceable for want of compliance with the requirements just described, see Sutherland Professional Funding Ltd v Bakewells [2013] All ER (D) 60 (Sep); [2013] EWHC 2685 (QB).

58  SI 2010/1013.

59  Regulation 4 of the 2004 Regulations.

60  See reg 8(1) and Sch 1 of the 2010 Regulations.

61  The FCA has set out detailed rules on the calculation of the total charge for credit: see FCA Handbook, CONC Appendices 1.1 and 1.2.

62  See reg 4 of the Consumer Credit (Total Charge for Credit) Regulations 1980 (SI 1980/51) and London North Securities Ltd v Meadows [2005] EWCA Civ 956. An agreement will not generally be treated as properly executed (and hence will be unenforceable) if it misstates the amount of the credit. For some of the difficulties that may arise in this type of case, see Wilson v First County Trust Ltd [2001] QB 407 (CA); Southern Pacific Securities plc v Walker [2012] UKSC 32.

63  There are important exceptions to this rule, for example where the agreement is signed on the bank’s business premises, or where the contractual negotiations did not include oral representations made by or on behalf of the creditor. Under s 189 of the 1974 Act ‘representation’ includes any warranty, statement or undertaking. However, it appears that the statement must be one of fact or opinion which is capable of inducing the debtor to enter into the contract: Moorgate Services Ltd v Kabir [1995] CCLR (CA). Where the creditor is a deposit-taker, these rules may overlap with the cancellation rules in the Distance Marketing Directive and the BCOBS chapter of the FCA Handbook—see the discussion in paras 3.23–3.25 above.

64  For timing and other details, see s 63 of the 1974 Act.

65  On the calculation of the cooling off period, see s 68 of the 1974 Act.

66  For the details of these rules, see s 71 of the 1974 Act.

67  On the categorization of regulated consumer credit agreements, see para 4.07 above.

68  See generally the tables of information set out in Sch 1 to the Consumer Credit (Agreements) Regulations 1983 (SI 1983/1553). If the agreement is cancelled, then any security given for the facility is likewise ineffective and must be released or returned: see s 106 of the 1974 Act and the decisions in Wilson v Howard [2005] EWCA Civ 147 and Wilson v Robertsons (London) Ltd [2006] EWCA Civ 1088.

69  Section 61(1)(b) of the 1974 Act recognizes the obvious point that the contract cannot set out any terms which the court may later see fit to imply.

70  Section 61(1)(c) of the 1974 Act. It should be noted that a ‘signature’ to the agreement may now be achieved through the use of an ‘I accept’ button on a website: see reg 5 of the Consumer Credit (Agreements) Regulations 2010 and Bassano v Toft [2014] Bus LR D9; [2013] EWHC 377 (QB).

71  For the details of these requirements, see s 63 of the 1974 Act.

72  Where an agreement is unenforceable by virtue of any the provisions of the 1974 Act, the court cannot grant relief to the creditor by providing a remedy in restitution, since this would effectively circumvent the policy of the legislation: Wilson v First County Trust Ltd (No 2) [2001] EWCA Civ 633.

73  On this subject, see Wilson v First County Trust Ltd [2004] 1 AC 816 (HL). This decision was reviewed in some depth in McGuffick v Royal Bank of Scotland plc [2009] EWHC 2386 (Comm).

74  See paras 6.6.20–6.6.30 of the Report.

75  See s 75(2) of the 1974 Act.

76  Section 75(4) of the 1974 Act.

77  See the Lloyds case, discussed below.

78  It will be recalled from s 75(1) (reproduced above) that liability under that section can only arise in relation to a debtor–creditor–supplier agreement which falls within the scope of s 12(b) or (c).

79  Section 75A was inserted by reg 12 of the Consumer Credit (EU Directive) Regulations 2010 (SI 2010/1010). On the EU’s Consumer Credit Directive itself, see the discussion at para 4.45 below.

80  [2008] UKHL 48 (HL).

81  The bank’s right to such an indemnity has been noted above.

82  The point was noted by the House of Lords in the Lloyds case above.

83  Jarrett v Royal Bank of Scotland plc [1999] QB 1 (CA).

84  See s 56 of the 1974 Act and the cases discussed by Paget, para 2.70 and Black Horse Ltd v Langford [2007] EWHC 907. In practice, there may be a degree of overlap between s 56 and the wider liability created by s 75 of the 1974 Act.

85  Durkin v DSG Retail Ltd [2014] UKSC 21.

86  Sections 86B and 86C of the 1974 Act.

87  For the rules on default notices of this kind and the circumstances under which they are required, see ss 87–89 of the 1974 Act.

88  See s 77 of the 1974 Act. Section 77(4) confirms that the agreement may not be enforced while the lender is in default of his obligations under this provision. However, the rights are not thereby permanently extinguished and may be resumed by the lender following compliance: see McGuffick v Royal Bank of Scotland plc [2009] EWHC 2386 (Comm).

89  See s 126 of the 1974 Act.

90  See s 140A–C of the 1974 Act, as inserted by the 2006 Act. These provisions replace the court’s earlier powers to re-examine ‘extortionate credit bargains’ under ss 137–140 of the 1974 Act. It may be noted that this power appears to be exercisable in relation to any credit agreement where the debtor is an individual, even if the agreement is otherwise exempt from the provisions of the 1974 Act. On exempt agreements, see paras 4.12–4.14 above.

91  For a recent case to the effect that the terms of a £50,000,000 real estate facility agreement were not ‘unfair’ for these purposes, see Deutsche Bank (Suisse) SA v Khan [2013] All ER (D) 205 (Apr); [2013] EWHC 482(Comm). For a similar decision in relation to a loan facility to assist in the acquisition of a company, see Maple Leaf Volatility Master Fund v Rouvroy [2007] EWHC 257, aff’d without reference to this point, [2009] All ER (D) 199 (Nov). A loan carrying an arrangement fee of 10 per cent was not unfair because the loan was intended to fund gambling activities—the high risk justified the high return—see Tamimi v Khodari [2008] EWHC 3065, aff’d [2009] All ER (D) 87 (Oct); [2009] EWCA Civ 1109.

92  A request for payment of arrears and/or the threat of legal action to recover those arrears do not create an ‘unfair relationship’ provided that the agreement is valid and the amounts in question are properly recoverable: see Re London and Scottish Finance Ltd (in administration) [2013] EWHC 407 (Ch).

93  [2012] Lloyds Rep IR 521; [2011] EWCA Civ 1128.

94  Plevin v Paragon Personal Finance Ltd [2014] Bus LR 553; [2013] EWCA Civ 1658. Harrison was overruled by the Supreme Court on appeal in the Plevin case: [29014] UKSC 61.

95  [2014] All ER (D) 103 (Jun); [2014] EWCA Civ 790.

96  FCA Handbook, ICOB.

97  It should be noted for this purpose that a representation made by a credit broker in the course of negotiations is deemed to be made on behalf of the lender itself: see s 56(2) of the 1974 Act.

98  [2014] All ER (D) 124 (Oct). See also Rahman v HSBC Bank plc [2012] EWHC 11 (Ch).

99  See Link Financial Ltd v Wilson [2014] EWHC 252 (Ch).

100  Under the former, ‘extortionate credit bargain’ provisions, a court would only intervene if the rate of interest was grossly exorbitant or if the transaction was otherwise contrary to ordinary principles of fair dealing. The new provisions do not apply to guarantees or affect ‘repayment on demand’ provisions: see Paragon Mortgages Ltd v McEwan-Peters [2011] EWHC 2491 (Comm).

101  2008/48/EC, OJ L 133, 22.5.2008, p 66.

102  Although the Directive is in part designed for the protection of consumers, it is also designed to avoid distortions in the market for consumer credit as a result of differences in national treatment. In other words, the Directive is a ‘single market’ measure: see recitals (4)–(9) of the Directive.

103  SI 2010/1011. Other secondary legislation designed to implement the Directive includes the Consumer Credit (Total Charge for Credit) Regulations 2010 (SI 2010/1011), the Consumer Credit (Disclosure of Information) Regulations 2010 (SI 2010/1013), and the Consumer Credit (Agreements) Regulations 2010 (SI 2010/1014).

104  The 2010 Regulations operate by inserting new sections into the 1974 Act and, where appropriate, by amending some of the secondary legislation made under that Act.

105  See the definition of ‘consumer’ in Art 3 of the Directive.

106  See para 4.12 above.

107  See Art 2(c) of the Directive.

108  See para 4.03 above.

109  See Art 2(f) of the Directive.

110  For a discussion of the government’s approach to the Directive and the required national legislation, see Department for Business Enterprise and Regulatory Reform, ‘Consultation on Proposals for Implementing the Consumer Credit Directive’ (April 2009).

111  This exemption has been discussed at para 4.14 above.

112  It would be inconsistent with the UK’s obligations under the Directive to allow the high net worth exemption to operate below that level, since the Directive does not allow for a corresponding type of exemption at all. The exemption can thus only be applied to credit agreements which are beyond the scope of the Directive in any event. The necessary amendment to the Consumer Credit (Exempt Agreements) Order 2007 is achieved by reg 62 of the implementing regulations. For domestic purposes, the limit of €75,000 has been translated into £60,260.

113  Article 5 of the Directive and the Consumer Credit (Disclosure of Information) Regulations 2010 (SI 2010/1013).

114  On these regulations, see para 4.27 above. For the revised text, see the Consumer Credit (Disclosure of Information) Regulations 2010 (see n 58 above).

115  The form and content of the SECCI is set out in Sch 1 to the Consumer Credit (Disclosure of Information) Regulations 2009 (see n 58 above). Where a lender concludes consumer credit contracts at a distance, the provision of SECCI to the debtor will be deemed to constitute compliance with the pre-contractual notice requirements of the Financial Services (Distance Marketing) Regulations 2004: see Art 5(2) and (3) of the Directive and reg 59 of the implementing regulations, inserting new provisions into the Financial Services (Distance Marketing) Regulations 2004 (SI 2004/2095).

116  See paras 4.25–4.29 above.

117  On these points, see Art 10 of the Directive.

118  Article 5(6) of the Directive and reg 3 of the implementing regulations (inserting a new s 55A into the 1974 Act).

119  Article 8 of the Directive and reg 3 of the implementing regulations (inserting a new s 55B into the 1974 Act). Recital (26) to the Directive states that this requirement is not merely directed to the creditor’s own interests but also to the consumer’s well-being, thus making it clear that part of the object is to ensure a socially responsible attitude to this type of finance.

120  See Art 14 of the Directive.

121  See the discussion at para 4.16 above. The wider rights of cancellation or withdrawal are transposed by reg 9 of the implementing regulations (inserting a new s 73A into the 1974 Act).

122  Article 14(3) of the Directive and reg 9 of the implementing regulations (inserting a new s 73B into the 1974 Act). This differs from the current position under the 1974 Act, where repayment of the capital is required within 30 days but the borrower is absolved from any obligation to pay interest: see the discussion at para 4.30 above.

123  Article 16 of the Directive. The 1974 Act currently allows for early repayment of the entire credit. Regulation 19 of the implementing regulations (inserting a revised s 94 into the 1974 Act) extends this right to partial prepayment. If the repayment exceeds £8,000 and is made in respect of a fixed rate interest transaction, the lender may be entitled to compensation of up to one per cent of the amount prepaid.

124  See para 4.29 above.

125  For the details, see Art 19 and Annex 1 to the Directive.

126  Advertisements for consumer credit facilities are now ‘financial promotions’, with the consequences noted in paras 4.25–4.26 above.

127  See Art 4 of the Directive.

128  It is not immediately obvious how this point could be verified.

129  For the details, see Art 4(2) of the Directive (n 58 above).

130  Unauthorized overdrafts are referred to in the Directive as ‘overrunning’.

131  Articles 6 and 18 of the Directive.

132  Article 6(1) of the Directive.

133  Article 18(2) of the Directive.

134  See Art 15 of the Directive. This provision is mirrored in s 75A of the 2004 Act and has already been discussed at para 4.34 above.

135  See Directive 2011/90/EU of 14 November 2011 providing additional assumptions for the calculation of the annual percentage rate, OJ L 296, 15.11.2011, p 35.

136  See Blair, Walker, and Purves, para 15.16, noting the terms of the FCA’s Perimeter Guidance, PERG 4.4.1AG(2).

137  A one-off secured loan provided by a relative of the borrower would therefore usually fall outside the scope of regulation.

138  Note that ‘timeshare’ accommodation is excluded for these purposes.

139  The point is made by PERG 4.4.2G. Certain provisions applicable to this type of business loan are discussed below.

140  PERG 4.4.7G.

141  For occasional exceptions, see PERG 4.4.8G.

142  Regulated Activities Order, Art 25A(1).

143  Regulated Activities Order, Art 25A(2).

144  Regulated Activities Order, Art 53.

145  These three activities are collectively defined as ‘mortgage mediation activities’ for the purposes of the FCA Handbook.

146  Regulated Activities Order, Art 61(1). If an unauthorized person enters into a regulated mortgage contract as lender, then the starting point will be that the loan is unenforceable under s 26 of the FSMA. However, the court may allow the enforcement of the loan if it is just and equitable in the circumstances: see s 28 of the FSMA and Helden v Strathmore Ltd [2011] EWCA Civ 542.

147  Regulated Activities Order, Art 61(2).

148  Regulated Activities Order, Art 64.

149  In view of the focus of this work, it is not proposed to consider the position of mortgage intermediaries or other participants in the process.

150  See Regulated Activities Order, Art 63B(3).

151  See generally Chapter 49 below.

152  Regulated Activities Order, Art 63F(2).

153  MIPRU 5.2.1R. This rule does not prevent the use of law firms for their ordinary services since they are generally outside the scope of the FSMA regulatory regime.

154  MIPRU 5.1.2G. For discussion of the merits of this approach, see Blair, Walker, and Purves, paras 15.39–15.42.

155  ie it must be able to meet its debts as they fall due.

156  MIPRU 4.2.3R.

157  MIPRU 4.1.4R.

158  Whether or not a loan is made for the purposes of a business will, of course, essentially be a question of fact. It seems that a loan taken out on an already occupied dwelling to facilitate the purchase of a buy-to-let property would be for investment, and not for business, purposes and would thus not amount to a regulated mortgage contract: see MCOB 1.5.2G.

159  See the Glossary to the FCA Handbook. In determining whether or not the entity is a ‘large business customer’, the bank may rely on the annual accounts and other information provided by the customer: see MCOB 1.2.6G.

160  For the details, see MCOB 1.2.7. The rule variations applicable to business loans are further described in MCOB 4.9.

161  This rule is applicable to financial promotions generally but, in the present context, is repeated in MCOB 2.2.6R. The requirement for fairness and clarity is extended to all communications (whether oral or written) with customers throughout the mortgage process, even if they do not strictly fall within the definition of a ‘financial promotion’: see MCOB 2.2.8G.

162  MCOB 2.2.3R. A ‘higher lending charge’ is an additional rate to reflect the fact that the loan exceeds a stated percentage of the property value.

163  MCOB 3.6. For example, MCOB 3.6.13 R(3) requires the well-known warning to the customer that his home is at risk of repossession if he fails to keep up his mortgage payments. MCOB 3.6 applies to ‘non-real time’ promotions—ie promotions not involving a personal visit or phone call. ‘Real time’ promotions involving such personal contact are regulated by MCOB 3.8.

164  See FCA Handbook, MCOB 13.3

165  Thakker v Northern Rock (Asset Management) PLC [2014] EWHC 2107 (QB).

166  Directive 2014/17/EU of the European Parliament and of the Council on credit agreements for consumers relating to residential immovable property, OJ L 60, 28.2.2014, p 34.

167  See Art 42 of the Directive.

168  See the discussion at para 4.40 above.

169  See Art 2 of the Directive.

170  See Art 3(3)(c) of the Directive.

171  See Arts 7 and 9 of the Directive.

172  See Arts 10 and 11 of the Directive.

173  See Arts 18–20 of the Directive.

174  See Art 35 of the Directive. It may be added that the FCA has recently published a consultation paper on the implementation of this Directive: see CP 14/20, ‘Implementation of the Mortgage Credit Directive and the new regime for second charge mortgages’ (FCA, September 2014).

175  Various revisions were made in December 2013.

176  On these points, see paras 1 and 2 of the Code. It will be noted that, in terms of the types of customer to which it applies, the scope of the Lending Code is similar to that of BCOBS: see the discussion of BCOBS, at paras 3.04–3.25 above.

177  Paragraph 3 of the Code.

178  The Lending Standards Board was established in 2009 as a successor to the Banking Code Standards Board.

179  On these points, see para of the Code. On the Payment Services Regulations 2009, see Chapter 5 below.

180  See para 15 of the Code.

181  Paragraph 17 of the Code. To this extent, it will be noted that the Code mirrors the provisions of BCOBS 4, discussed at paras 3.17–3.21 above.

182  It will also be necessary to take account of the Information Commissioner’s Data Protection Guidance on Filing Defaults with Credit Reference Agencies: see para 43 of the Code.

183  See para 50 of the Code.

184  See para 171 of the Code.

185  See para 215 of the Code.