Asset Finance: CCA Default Notices to be changed by 2 June 2021

On 2 December 2020, the Consumer Credit (Enforcement, Default and Termination Notices) (Coronavirus) (Amendment) Regulations 2020 (SI 2020/1248) (“2020 Regulations”) came into force, amending the Consumer Credit (Enforcement, Default and Termination Notices) Regulations 1983 (SI 1983/1561) (“1983 Regulations”).

Requirement for a default notice

Section 87 of the Consumer Credit Act 1974 necessitates service of a default notice on a debtor or hirer before a creditor or owner may become entitled by reason of any breach by the debtor or hirer of a regulated agreement to do any of the following:

• Terminate the agreement;
• Demand earlier payment of any sum;
• Recover possession of any goods or land;
• Treat any right conferred on the debtor or hirer by the agreement as terminated, restricted or deferred; or
• Enforce any security.

The content and form of default notices, which is highly prescriptive and includes requirements as to the precise form of wording to be included, the prominence of specified parts of the notice and ordering of the prescribed wording, is governed by section 88 of the CCA and the 1983 Regulations. While minor tweaks have been made over the years, most of the requirements remain the same as when the 1983 Regulations came into force.

FCA’s proposals

The FCA’s March 2019 final report on the review of retained provisions in the CCA recommended that the requirement to serve a default notice be retained in the CCA, but the informational requirements, or prescribed wording, be moved into the FCA’s rules.

Various high-level suggested changes were made by the FCA with the aim of providing financiers with more flexibility as to the inclusion of information to allow shorter, more targeted notices and to otherwise modernise the procedure for default notices, but many of the suggestions have not been accepted by the Government.

On announcing the 2020 Regulations on 7 October 2020, the Government stated that:

“The new rules will make debt letters less threatening by restricting the amount of information that must be made prominent and requiring lenders to use bold or underlined text rather than capital letters. Lenders will also now be able to replace legal terms with more widely understood words and letters will clearly signpost people to the best sources of free debt advice.”

Implemented changes

The changes effected by the 2020 Regulations are principally directed to the prescribed wording, as opposed to the form and non-prescribed wording of the notices. In summary, the most significant changes are:

• The removal of all words written in capital letters from the prescribed wording.
• Reducing the amount of wording that is required to be made prominent. Prominence may only be achieved by bold print or underlining, and capital letters and large print are no longer permissible.
• Reordering the prescribed wording.
• Removing the reference to “ENFORCEMENT ACTION”.
• Explaining the role of a surety or guarantor.
• Advising borrowers to contact creditors if they are unsure about whether they have repaid at least one-third of the total price of the goods.
• Advising borrowers on where to access advice on how to obtain a time order.
• Toning down the prescribed wording relating to post-judgment interest.
• Updating the institutions that can provide assistance, to refer to the Government’s Money Advice Service and the institutions identified on the FCA’s default information sheet.

It is important that financiers properly incorporate these changes by the grace period of 2 June 2021. It has always been the case that a failure to provide a default notice that complies with section 88 of the CCA and the 1983 Regulations, except for de minimis failings, renders the notice ineffective and is also relevant when considering the fairness of any relationship between a creditor and a debtor.

The 2020 Regulations also amend, in an even more limited way, the prescribed wording and prominence requirements of notices sent under section 76(1) (notices to enforce a term) and section 98 (termination notices) of the CCA.