» consultation paper - June 2006 rules for the new consumer credit jurisdiction - chapter 1 background

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consultation paper - June 2006 rules for the new consumer credit jurisdiction - chapter 1 background

recent legislative changes

1.1 The Consumer Credit Act 2006 received royal assent in March 2006. It amends the Consumer Credit Act 1974 and the Financial Services and Markets Act 2000. It was the culmination of a three-year review of consumer credit law by the government, aimed at protecting consumers and creating a fairer, more competitive credit market by:

  • enhancing consumer rights and redress by empowering consumers to challenge unfair lending, and through more effective options for resolving disputes;
  • improving the regulation of consumer credit businesses by ensuring fair practices and through targeted action to drive out rogues; and
  • making regulation more appropriate for different types of consumer credit transaction by extending protection to all consumer credit and by creating a fairer regime for business.

1.2 This consultation paper is about the first of these three elements. This involves the setting up of a new ombudsman service for consumer credit to be provided by the existing Financial Ombudsman Service. The categories of consumer credit activities to be covered are described later, in paragraph 3.1. This service will be provided for all existing categories of consumer credit standard licence-holders from 6 April 2007.

1.3 The purpose of this consultation paper is to outline how the ombudsman service for consumer credit will work in practice, as well as to seek feedback from both businesses and consumers on some of the issues surrounding this.

the ombudsman service

1.4 The Financial Ombudsman Service’s compulsory jurisdiction already covers most businesses that are regulated by the Financial Services Authority (FSA) - not only for FSA-regulated financial services activities but also for some consumer credit activities. The legal foundations of the ombudsman service are set out in Part XVI and Schedule 17 of the Financial Services and Markets Act 2000. The Consumer Credit Act 2006 amended these parts of the Financial Services and Markets Act 2000 in order to add a new consumer credit jurisdiction. Extracts from the 2000 Act, as amended by the 2006 Act, are set out in annex A.

1.5 It is intended that the new consumer credit jurisdiction should mirror the existing compulsory jurisdiction for financial services. The key elements of the ombudsman service are:

  • consumers complain to the business first, but have access to the ombudsman service if the business does not resolve the complaint satisfactorily;
  • disputes are resolved promptly and informally by an independent person, on the basis of what is fair and reasonable in all the circumstances of the case;
  • the ombudsman has the power to require all parties to a dispute to provide the information or documents necessary for the ombudsman to resolve the dispute;
  • the ombudsman’s decision is binding on all parties if the complainant accepts it, but is binding on neither if the complainant does not;
  • the ombudsman may require the business to pay an award (of up to £100,000) or take other steps the ombudsman considers just and appropriate;
  • the service is funded by businesses through a combination of levies raised on all businesses and fees paid by businesses on each case they are a party to.

1.6 Under the Consumer Credit Act 2006 the Secretary of State for Trade and Industry will specify, by statutory instrument, the types of consumer credit business that are to be covered by the ombudsman service. His powers to do this came into force on 16 June 2006. The intention is to specify all of the existing licence categories with effect from 6 April 2007 - and the Act provides that the ombudsman service will cover acts and omissions occurring on and after (but not before) that date. The new licence categories of “debt administration” and “provision of credit information services” will be brought within the scope of the ombudsman service once they have been introduced, which is intended to happen on 1 October 2008.

1.7 The 2006 Act requires the Financial Ombudsman Service, with the approval of the FSA, to adopt detailed “consumer credit rules” to supplement the general requirements set out in the Act. These rules are intended to cover detailed issues such as the procedures for the ombudsman service, the relevant time limits and the funding arrangements. It is these rules that we are formally consulting about in this paper.

1.8 Once the Financial Ombudsman Service has adopted the consumer credit rules following the feedback obtained from this consultation, they will be incorporated into the FSA’s Handbook in the chapter entitled “Dispute Resolution: Complaints” (usually referred to as “DISP”). The consumer credit rules we are proposing to adopt are set out in annex B.

1.9 Annex B shows an extract from DISP as it would look once the proposed consumer credit rules have been adopted. The amendments required to achieve this are highlighted, so consultees can see all the proposed changes in the context of relevant rules. Annex B also highlights a small number of consequential rule changes that the FSA proposes to make to DISP, following a parallel consultation - which will start in July - about the compulsory jurisdiction. The compulsory jurisdiction consultation paper will be published on the FSA website.

structure of consultation paper

1.10 This consultation serves two purposes. The first is the formal one of consulting on the consumer credit rules we propose to make, as required by the Act. The second is to explain to both businesses and consumers how the new ombudsman service for consumer credit will work more generally.

1.11 The relevant legislation in annex A and the proposed consumer credit rules in annex B are legal texts which may be difficult for some to follow. So chapters 2 to 6 set out to explain what these mean in non-legal language. Chapter 2 explains the general principles we have used in drafting the consumer credit rules, while chapters 3 to 6 explain the rules themselves. These do not cover every detail of the rules, but do explain the key features of the ombudsman service that businesses and consumers will want to be aware of.

1.12 There are some aspects of the proposed consumer credit rules on which we are seeking feedback from consultees. At various points in chapters 2 to 6 there are questions which we have highlighted. These questions are summarised in chapter 7 for easy reference. It would be helpful if consultees were to focus on these questions in their responses.

1.13 Chapter 8 sets out to answer some anticipated queries from businesses and consumers about the new ombudsman service for consumer credit.