Summary of the Consumer Credit Act of 2006

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Summary of the Consumer Credit Act of 2006
The Consumer Credit Act was passed to protect UK borrowers. (British pound 55 image by chrisharvey from Fotolia.com)

The Consumer Credit Act of 2006 was passed by the Parliament in the United Kingdom and designed to give consumers protection when borrowing money. The Act improved protections offered by the Consumer Credit Act of 1974 by allowing for a Financial Ombudsman to settle disputes between consumers and UK financial businesses, such as banks, insurance companies and investment firms. The Act also gives authority to the Office of Fair Trading to impose civil penalties on financial companies that do not comply with its conditions.

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Background

According to a 2004 BBC News story, the aim of the new legislation was to protect vulnerable people from taking on too much debt by creating more fairness in lending practices. The reform measures were part of an ongoing update of UK consumer credit laws. According to the BBC, "The revamp occurs against a backdrop of soaring UK personal debt and concerns that interest rates rises may force heavily indebted Britons to the wall."

Revision of Previous Consumer Credit Act

The new law included an "unfair credit" test that makes it easier for borrowers to take creditors to court for unnecessarily high interest charges. Consumers have free access to the Financial Ombudsman service if disputes cannot be satisfactorily resolved directly with creditors. Lenders are required to provide annual financial statements to consumers showing the full amount owed. In the 1974 law, creditors could lose their license for infractions, but under the 2006 law, creditors' licenses can be restricted, and they can also be fined.

Reactions from Consumer Groups

According to the BBC, consumer groups were encouraged by passage of the 2006 Act. Malcolm Hurlston, chairman of the Consumer Credit Counseling Service, stated that consumers would be able to make better-informed decisions as a result of the bill. Teresa Perchard, Director of Policy at Citizens Advice, felt the changes were long overdue. "The law in this area has failed to keep pace with a rapidly changing credit market, and it is low-income consumers, who can least afford it, who have paid the price of inadequate controls," she noted.

Effects

According to Legal News, some provisions of the legislation took full effect in 2008. Some of these include a requirement for creditors to send borrowers periodic statements regarding the health of their accounts, arrears notices and a requirement to restrict interest on default sums to simple interest. Failure of creditors to comply with these guidelines impacts the enforceability of the original credit contract.

Broad Definition of Fairness

According to Legal News, the new concept of fairness in the 2006 Act covers more than the past concept of "extortionate credit." The new Act may consider any credit agreement unfair if the creditor has marketed the credit in an aggressive manner or has harassed a customer who is behind on payments

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