Legal Article - Business Law

The Use of the Consumer Credit Act in the Motor Retail Industry

The motor trade relies on credit arrangements for much of its business whether it be from the use of credit cards for deposits and other smaller transactions, up to large purchases using loans, HP, conditional sale agreements etc.

Consumer credit has a number of controls under the Consumer Credit Act, and the new Consumer Credit Directive 2010 which has a narrower scope with regards to consumer credit agreements.  Also caught by the same Act is Consumer Hire but not short-term hire.

The main issues affecting the motor trade are as follows:

1. Licensing

2. Advertising

3. Documentation

4. Extortionate Credit


Consumer Credit Licence Requirements

Consumer Credit Licence Requirements

Most motor dealers will need a Consumer Credit Licence. Without one it would be illegal to sell the vast majority of cars on credit.
Most commonly motor dealers act as credit brokers i.e. they introduce customers to sources of credit; through a finance agreement they arrange a 3 way link up of customer – trader – finance company.

The customer receives a car from the dealer and credit from the finance company. The dealer receives money partly from the customer as a deposit but the larger part from the finance company.

The finance company will often legally own the car until the customer has paid them the loan back with interest over monthly/weekly payments.

We get many queries from clients about letting cars go out when the customer has signed the car finance documents and then the finance company deciding to not proceed with the deal. The customer ends up with the free loan of a car.

The position is that any party can stop the finance deal going through prior to all three parties signing the agreement. Whenever this happens the customer must be given the deposit and any part exchange vehicle back.

If the part exchange vehicle has been sold then the dealer must return the agreed part exchange value. This leads to an extra difficulty when the dealer has over allowed on the part exchange vehicle.

Furthermore the insurance position must be considered when a customer takes a vehicle before the finance company pays out. Again we have had situations where a vehicle is not insured if the customer drives it prior to the sale.

In a smaller number of cases the dealer will actually be the creditor thereby cutting out the finance company. Whether a credit broker or creditor, the motor dealer must hold a Consumer Credit Licence to trade in that way.

Consumer Credit Licences are obtained for a fee from the Office of Fair Trading (OFT) in London (not Trading Standards Departments). Needless to say it is very important to acquire a licence, and secondly, keep it. 

The OFT keep careful watch over potential and current licences. If they have received notification of criminal offences or a large number of consumer complaints then they can turn down a licence application or decide that a licence should be revoked.

There is an appeals procedure but it is wise not to get to that point if at all possible. Furthermore if you are in business with or are related to someone else who has an adverse record then the OFT can use those factors against you.

As well as stipulating the applicants name the licence will also contain particular trading names as requested. No others must be used. It will also contain the categories of activities such as credit brokerage, debt collecting etc. Any changes on the licence must be notified to the OFT.

 

Motor Retail Advertising

Motor Retail Advertising

Advertising comes in many forms:

• Press local/national

• TV/radio

• Hoardings

• Buses

• Showroom signs

• Mailshots

And there will be more.

If you give any indication that you will be providing finance/credit or hire (for regulated agreements) then the requirements of the Regulations for credit/hire advertising will take effect.

The Regulations are by no means straightforward and you would do well to Contact Lawgistics if you are at all unsure. 

 Advertisements can be complicated by advertising two or more credit deals, with certain information from one deal mixed with information from another.

It is a fundamental requirement that all credit/hire advertisements are not false or misleading. Some advertisements are not caught by the Regulations but are still caught by this requirement.

It is the equivalent of the Trade Descriptions Act but for credit advertisements. Theoretically a consumer credit advertisement could comply with the Regulations but still be false or misleading.

As an example if the amount of credit was more prominent than the cash price thereby giving the impression of lower prices then this could be misleading.

A ‘mixed’ deal could also be misleading.

As indicated above some advertisements are not caught by the Regulations. The most common exemptions are:

• The credit/hire is advertised for business purposes only. It is not unusual to advertise in this way. The Regulations would apply if the credit was available to both businesses and individuals, and therefore it should be made clear in the advertisement that it is directed to business users only.

The same applies to credit available for companies.

• In the case of hire which would always exceed £25,000 (either unsecured or not secured on car).

• In the case of hire which will not last for more than 3 months or will cost more than £25,000.

Obviously for most retailing situations the Regulations will apply. There are 3 ‘levels’ of credit/hire advertisements depending on how much information is to be included called Simple, Intermediate and Full.

Credit Advertisements

Credit Advertisements

A Simple credit advertisement can only include as a maximum:

• Name (as on Consumer Credit Licence)

• Address

• Phone number

• Logo

• Occupation eg car finance

Needless to say these advertisements are generally easy to manage. They are generally used to keep the name in the public eye eg football side boards, drinks coasters, supermarket till rolls etc.

You cannot include cash price in a simple advertisement. If you wish to give a little more information then you need to upgrade to an Intermediate credit advertisement.

For the majority of Intermediate credit advertisements for motor dealers then they will
include:

• Name (as on Consumer Credit Licence)
• Address or Phone number
• Cash Price
• APR
• Deposit (optional)

The statements:

“Written quotations on request”

“Subject to status”

“A guarantee may be required” (if applicable)

This type of advertisement is often used as a small block advertisement quoting vehicles for sale in a local newspaper for a particular week. If the APR varies with price then a ‘typical’ APR (and Deposit) if applicable can be used. We would suggest a mid priced vehicle be selected for this purpose.

Please note the following points:

• The name/address/phone number is not necessary if the advertisements are on, say, a window display or a leaflet at the premises.

• If any mention is made of the availability of credit and cash prices are shown then the APR must be given.

• If deposits are shown then again the APR must be given

• No more information than that given above can generally be given in typical motor dealer advertisements at the Intermediate level. Any mention of, say, ‘monthly’ relating to repayments or ‘2 years to pay’ or the amount of repayments then the advertisement needs to be upgraded to a Full credit advertisement.

The beauty of a Full credit advertisement is that providing you include the minimum information necessary, then you can include other information. As with Intermediate where the details vary from one price to another, a typical example can be shown.

The following information must be included in a typical motor dealer Full credit advertisement:

• Name (as on Consumer Credit Licence)
• Address
• Cash Price
• Deposit
• Number of repayments
• Frequency of repayments (eg ‘monthly’)
• Amount of repayments
• Total amount repayable
• APR
• Any additional payments/charges and when they are due (eg option to
• purchase payment for HP agreements, Administration charge etc)

The statements:

“Written quotations on request”

“Subject to status”

“A guarantee may be required”

• Any other restrictions on the availability of the credit

The Full advertisement is generally used for the more ‘busy’ advertisements. Where problems commonly arise is in the mixing of two or more deals to push attractive features such as low deposits, interest free, delayed payments, long payback periods etc.

It is invariably the case that finance companies will not combine, say, interest free with a low deposit. This is not to say that the 2 deals cannot be advertised but always ensure that the minimum information is given for each deal. 

It may be that one deal could be catered for as an Intermediate advertisement and the other one as a Full advertisement.

Always also keep in the back of your mind, however, that you could be prosecuted for giving a misleading advertisement. So make it clear by breaking up the whole advertisement into the separate deals and treating each deal separately.

There are certain requirements for credit advertisements in general and for typical motor dealer advertisements these are as follows:

• The APR must be more prominent than any other interest rate (eg flat rate)

• The APR must be as prominent as the other numerical information except the cash price e.g. a deposit amount, number amount or frequency of repayments and other charges, any credit repayment, any period of time.

• All financial information must be easily legible, clear and together as a whole. This is particularly important in the development of web sites.

• The expression ‘0%’ or ‘interest free’ should not be used unless the customer pays no more than the cash price. As well as the ‘top line’ cash price this also means that you can’t adjust part exchange values between cash and interest free credit deals.

• The expression ‘weekly equivalent’ or similar should not be used unless weekly payments are provided for under the terms of the agreement. 

• Expressions that make the deal on offer sound better than the deals generally on the market, unless you are prepared to identify other dealers and their terms. 

For instance the expression ‘low rate finance’ is not permitted unless you use a Full advertisement and compare your rate with another persons similar deal and identify that dealer.

Hire Advertisements

Hire Advertisements

A Simple hire advertisement can only include as a maximum:


• Name (as on Licence)
• Address
• Phone Number
• Logo
• Occupation

For the majority of motor dealer Intermediate hire advertisements then the following information would be included:

• Name (as on licence)
• Address or Phone Number
• A statement to clarify the customer that a hire arrangement is being advertised
• Deposit (optional)
• Duration of hire agreement (optional)

The statements:

“Written quotations on request”
“Subject to status”
“A guarantee may be required” ( if applicable)

As with Intermediate credit advertisements certain points should be particularly noted:

• The name/address/phone number is not necessary if the advertisements are on, say, a window display or leaflet at the premises.

• No more information than that given above can generally be given in a typical motor dealer advertisements at the Intermediate level. If you wish to include information about the frequency (eg monthly) or the amount of repayments then the advertisement needs to be upgraded to a Full advertisement.

In a Full hire advertisement certain information must be included which, in the case of typical motor dealer advertisement, would be;

• Name (as on the Consumer Credit Licence)
• Address
• A statement to clarify to the consumer that a hire arrangement is being advertised
• Deposit
• Frequency of repayments (eg ‘monthly’)
• Amount of repayments
• Any additional payments/charges and when they are due
• Hire period

• The statements:

“Written quotations on request”
“Subject to status”
“A guarantee may be required” (if applicable)
• Any other restrictions on the availability of the hire

As with credit advertisements the expression ‘weekly equivalent’ or similar should not be used unless weekly payments are provided for under the terms of the agreement.

The preparation and layout of finance/hire advertisements is very complex. 

It is not immediately obvious what information can or cannot be included. The repercussions for the motor trader are extremely serious.

The absence of, or inclusion of one piece of information can mean the difference between a legal and illegal advertisement and therefore a potential fine, which at the time of writing is £5000. 

It must also be said that the detection of advertising problems is extremely easy for the enforcement authorities, since it takes nothing more than a sit down with the paper, or surfing the web, to find the offenders.

It is very tempting for dealers to promote aspects of, say, a credit deal e.g. low deposits, interest free or to offer it to people with poor credit status but, as they say, there is no such thing as a free lunch.

Credit deals are always a balance of different features and the purpose of the Regulations is to give a balanced picture. If you need any assistance always take advice from Lawgistics on this very complex area.

Financial Documentation

Financial Documentation

Most retailers will use documentation prepared by the finance/hire company. Having said that it is important to be aware that the wording and layout of financial documents are laid down in Regulations.

If agreements are not in accordance with the Regulations then they may be unenforceable. If agreements are signed off trade premises then different agreement documents are required and the customer has a cooling off period when they can back out of the deal.

When the agreement needs to be terminated then there are further documents and procedures, which need to be adopted.

If a motor dealer gets involved in consumer credit or consumer hire agreements it is recommended that they get armed with all the required documents, which are all available off the shelf.

 

Extortionate Credit

Extortionate Credit

Brief mention should be made of the special powers under the Consumer Credit Act in regard to credit, which is considered extortionate. The rate of interest set by a credit provider will take into account the risk and financial commitment involved.

There is no magic formula for setting such a rate and the temptation by unscrupulous lenders is to charge extortionate rates.

There are provisions in the Act for a customer to take their agreement to the County Court and have a review of the terms of the agreement to consider if they are extortionate.

If the Court feels the terms are extortionate then it can order the agreement be amended eg to repay excessive interest charges or order payment over a longer period.

The factors that the Court will consider are:

• The customers age, experience, business capacity and state of health
• The extent and nature of financial pressure on the customer
• The risk to the dealer
• The relationship between the customer and lender
• Whether the price was inflated for credit arrangements
• The current interest rates in the marker place
• Whether additional transactions with the credit deal favour the customer or lender e.g. a warranty

Unless motor traders get involved with providing credit themselves then it is unlikely that this area will ever cause problems.

Author: David Combes

Published: 16 Mar 2011

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