Pitfalls in Annual Credit Statements
We recently prepared for trial a Funder’s defence to a claim which raised a number of difficult issues in relation to the annual statements required for a fixed sum credit agreement regulated by the Consumer Credit Act 1974 (“CCA”). In the event the matter settled before trial but a number of interesting points arose and are worth considering.
The claim sought repayment of interest paid under a regulated Hire Purchase Agreement (“the Agreement”) on the grounds that annual statements issued by the Funder failed to comply with section 77A of the CCA and the strict requirements of the Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007 (“the Regulations.”)
The Regulations draw a distinction between agreements with interest being “applicable on a per annum basis” and those with interest “not applicable on a per annum basis,” and although there is a lack of clarity in the precise meaning of these terms the latter concept is explained in the OFT’s 2010 Guidance on CCA Post-contract information Requirements (OFT 1002) at para 2.6:-
“There are special provisions in respect of agreements with pre-computed interest – under which interest is calculated at the start of the agreement rather than on the basis of the balance outstanding.”
This is important because paragraph 3 (h) of the Regulations requires a statement to show “the amount and date of any interest … payable by the debtor which became due during the period to which the statement relates, whether or not the interest … relate only to that period”. Where interest is pre-computed at the outset it would be extremely difficult if not impossible for Funders to provide this information, so such agreements are exempt from the obligation to comply with paragraph 3(h).
Paragraph 3 (c) (ii) of the Regulations requires to be stated: –
“the rate or rates of interest on the credit provided under the agreement, in each case quoted on a per annum basis and a statement explaining how and when interest charges are calculated and applied under the agreement”.
The debtor’s complaint was: –
- there was no explanation of “how and when interest charges are calculated and applied under the agreement”; and
- the statements did not “include the correct rate of interest noted on the credit agreement” because they referred to the APR rather than the rate of interest, and were also slightly wrong in stating this figure by 0.1%.
In essence the Funder: –
- accepted that the section 77A statements provided to the debtor were defective in that they did not explicitly explain how and when interest charges were calculated and applied;
- accepted that the correct rate of interest did not appear on the statements by 0.1%, but contended that this error was excused by the application of the de minimis principle; and
- contended that in any event, the claim must fail because of a saving provision in Regulation 41 of the 2007 Regulations.
In our view these issues must be seen in the context of the detailed and extensive legislative requirements relating to the provision of information to the debtor both before and during the Agreement, which relate both to: –
- information which is actually provided to the debtor, and
- information which the Funder would have been obliged to provide to the debtor had he so requested.
In summary (and in addition to the section 77A statements themselves) these various requirements are: –
- pre-contractual explanations required by the FCA’s consumer credit sourcebook (“CONC”);
- pre-contract information provided in the SECCI;
- the detailed financial information in the Agreement itself;
- information in CCA section 87 default notices;
- the standards required by CONC in dealing with debtors in default or arrears difficulties, for example in CONC 7.3.4;
- the duty to provide information on request under CCA section 77(1);
- the duty to provide a statement on request under CCA section 77B; and
- the duty to provide a settlement statement on request under CCA section 97.
Section 77A of the CCA has since 1 October 2008 required the Funder to give an annual statement setting out the information prescribed by the 2007 Regulations, and provides: –
“(6) Where this subsection applies in relation to a failure to give a statement under this section to the debtor–
(a) the creditor shall not be entitled to enforce the agreement during the period of non-compliance;
(b) the debtor shall have no liability to pay any sum of interest to the extent calculated by reference to the period of non-compliance or to any part of it; and
(c) the debtor shall have no liability to pay any default sum which (apart from this paragraph)–
(i) would have become payable during the period of non-compliance; or
(ii) would have become payable after the end of that period in connection with a breach of the agreement which occurs during that period (whether or not the breach continues after the end of that period)”.
In this regard it is important to understand that an error or omission in a required statement can have cumulative consequences, in that unless and until the error is correct the Funder will remain subject to the sanction of section77A:-
“(7) In this section ‘the period of non-compliance’ means, in relation to a failure to give a statement under this section to the debtor, the period which–
(a) begins immediately after the end of the period mentioned in subsection (5); and
(b) ends at the end of the day on which the statement is given to the debtor or on which the conditions mentioned in subsection (4) are satisfied, whichever is earlier.”
Rate of Interest or APR?
The 2007 Regulations make no distinction between the rate of interest and the APR. The APR takes into account documentation fees and any other items which reflect the true cost of credit, so is the more relevant concept to a debtor; as the SECCI states:-
“This is the total cost expressed as an annual percentage of the total amount of credit. The APR is there to help you compare different offers.”
Professor Goode’s leading textbook on the subject, The Encyclopaedia of Consumer Credit Law and Practice expresses the following view in relation to the requirements of paragraph 3 of Schedule 1 of the 2007 Regulations: –
… there is no definition of ‘rate of interest’ either with special reference to the regulations or with reference to the APR. It is possible that this problem will be solved by yet further amendments to the 2007 Regulations or it may have to be solved by litigation. Clearly the safest advice to creditors is to use the APR if humanly possible”.
In our view this is correct and it is the APR to be shown in the section 77A statements, but not all Funders share this view.
There is a long established general rule of law that a de minimis error can be disregarded.
The application of the de minimis principle in the consumer credit context can be seen for example in JP Morgan Chase Bank NA v Northern Rock (Asset Management) plc  1 W.L.R. 2197 at paragraphs 41–44 where the judge said:-
“41 Elsewhere in the consumer credit legislation, errors in or late service of notices which can be regarded as de minimis can be ignored, but unless the de minimis rule saves the error, the notice is invalid.
42 For example, Goode, Consumer Credit Law and Practice …para 13.64 states as follows:
“Where the remedial action which the debtor or debtor is required to take is the payment of arrears, these must be specified accurately… Anything more than a de minimis misstatement will make the default notice invalid. The same is presumably true of any other remedial action, though the question is less likely to arise. It also seems to follow that a substantial error in stating any of the other items listed will be fatal.”
43 In the same textbook, at para 5.168:
“Where the discrepancy between the amount referred to in the default notice and the true amount required to remedy the breach is a minor one, the court may overlook that discrepancy on the basis of a de minimis exception …”
44 In my view, the position is similar when one looks at section 77A and regulation 41. Unless the error or omission is minor, there is a breach of the Regulations. It must follow that the statement is invalid, and thus of no effect for all purposes”.
Here the debtor’s opportunistic claim based on the slight discrepancy of 0.1% should in our view be disregarded on the basis of the de minimis principle.
Proper construction of regulation 41 of the 2007 Regulations
Regulation 41 of the 2007 Regulations provides:-
“Where a notice or statement contains an error or omission which does not affect the substance of the information or forms of wording which it is required by these Regulations to contain, that notice or statement shall not breach these Regulations on this ground alone”.
There is no reported case which directly addresses the proper construction of regulation 41. However, regulation 41 did fall to be considered as a side issue in the JP Morgan Chase Bank case.
That case involved errors which had been made in section 77A statements relating to equity release mortgage loans, and was litigated not by a debtor but between two creditors between whom there had been an assignment of various mortgage loans. The issue in the case related not to the proper construction of regulation 41, but was “where a creditor has provided the debtor with a statement which fails to set out the information required by the Regulations (“a non-compliant statement”), when does the period of non-compliance commence?”
The parties agreed that regulation 41 could not apply to save the errors involved in that case.
However, the judgement can be taken as some guidance on the proper approach to the construction of regulation 41 because at paragraph 36 (4) the judge said: –
“… Any statement which cannot be saved by regulation 41, and which breaches the Regulations in a material way, is ineffective as a statement”.
As far as we are aware the only relevant comment on the proper construction of regulation 41 appears in The Encyclopaedia of Consumer Credit Law and Practice by Professor Goode. Before dealing with regulation 41 Goode has the following to say about the 2007 Regulations in general:-
The 2007 Regulations constitute a triumph of regulation over common sense. They have already caused horrendous problems principally because, unlike the provisions for improperly executed agreements, the sanctions for non-compliance with the Regulations cannot be alleviated by the courts (nor is there any provision for relief by the regulator). Consequently, minor errors (even ones caused by unforeseeable computer glitches) are visited with major consequences and unwitting or even undeserving debtors end up with huge windfalls. Furthermore the problems are cumulative. If the statement for, say, 2012, contains an error, then interest has ceased to run from the date it was due to be served. If, however, nobody notices the error, then the statement for 2013 will necessarily be in error because it will contain the interest which (unknown to both parties) has not been running. And so on. How this situation can be reconciled with a responsible system of consumer protection is very hard to see”.
In relation to regulation 41 Goode states as follows: –
When the regulation appeared, this seemed to be no more than a standard de minimis kind of provision. The horrendous and wholly disproportionate sanctions visited on minor errors in statements, coupled with their cumulative effect, and the fact that there is no access to judicial intervention have driven lenders into invoking this regulation where statements have been shown to be technically non-compliant in some trivial way or there has been a misunderstanding of some of the more convoluted provisions of the regulations (especially those for aggregated agreement). One question that will have to be answered is whether the words ‘substance of’ govern both the information and the forms of wording or only the former. The better view is that they apply to both because otherwise any error in the forms of wording would be outside reg 41 which cannot have been the intention. Reg 41 appears not to have been litigated yet and it is to be hoped that pragmatic judges will realise that many of the requirements of the regulations are no more than meaningless and officious consumerist bureaucracy and have no benefit to the consumer in themselves. Indeed the only potential benefit is that the commission of some minor error on the part of the lender may afford the consumer a large and entirely undeserved windfall. In circumstances, therefore, where the mistake in the statement is the result of some unintended error or computer glitch and the consumer has been given the information he needs to know (as opposed to all the additional information that the draftsmen of the regulations think it might be nice for him to know), then one would imagine that a sensible court will take a fairly relaxed view of the application of reg 41”.
In our view the approach of Professor Goode to the proper construction of regulation 41 should be followed. Any alleged breach of the 2007 Regulations should be seen in the context of whether it involves a requirement to provide a debtor with useful and relevant information to enable him to understand his rights and obligations under the Agreement. Thus errors in stating the amount of payments received or the outstanding balance remaining could not normally be expected to fall within regulation 41, but a purely technical oversight which is irrelevant to the debtor should normally attract relief.
The claims industry seems to have been slow to exploit the strict requirements of section 77A and the 2007 Regulations, but Funders should take steps to ensure that annual statements are correctly computed or they will be vulnerable to claims for the repayment of interest. One of the main takeaways is that once an error or omission is made in a statement, then unless the court accepts the arguments described above either on de minimis or the saving provision in regulation 41 then the period of non-compliance only ceases when a compliant statement is served, with potentially disastrous consequences in relation to interest and charges already paid.