A GENERAL BACKGROUND
ACT/LICENCING REGIME
TO
THE
CONSUMER
CREDIT
THE REQUIREMENT FOR CONSUMER CREDIT LICENCES
The Consumer Credit Act 1974 requires most businesses that offer credit or lend money
to consumers to be licensed by the Office of Fair Trading. Trading without a licensing
arrangement is a criminal offence and can result in a fine and/or imprisonment.
Details of every business which has a licence, has applied for one, or had one revoked,
suspended or varied, are available to the public in the Consumer Credit Register.
The Act also applies to brokers and other intermediaries. This includes retailers who
simply arrange credit for their customers using the services of a finance company.
If dissatisfied with some aspect of the business to be licensed, the OFT may impose a
requirement on the business to do – or to stop doing – something in order to address the
cause(s) of its dissatisfaction. The OFT can impose a financial penalty of up to £50,000
on a business which fails to comply with a requirement.
Businesses are not likely to need a licence if:
 They only deal with limited companies (or, in the case of credit reference agencies,
they only furnish information about limited companies)
 They are just accepting credit cards or trading checks issued by someone else (and
they don't introduce the borrower to them)
 They are just allowing customers to pay their bills in four or fewer instalments
within a year beginning on the date of the arrangement.
The licence must cover all the categories of credit activities that the business plans to
carry out. It is a criminal offence to:
 Not have a licence when one is required; and/or
 To carry out any activities that are not covered by the licence.
This is punishable by a fine, imprisonment or both.
If any credit activity is entered into when not licensed it is unenforceable unless the OFT
grants a validation order which means that it was as if the entity was licensed when it
entered into the transaction.
The OFT has identified a number of debt-related activities which it considers, by their
nature, to be of higher potential risk to consumers, including:
 commercial debt adjusting
 commercial debt counselling
 commercial credit repair
 debt collecting
 secured lending, broking and debt administration to sub-prime consumers
 lending and broking which takes place in the home
 credit reference agencies.
Businesses are advised to only apply for those licence categories that cover their
activities. Applying for a high risk category will mean increased scrutiny.
WHAT IS EXEMPTED
Exempted transactions, where a business does not need a licence, include consumer
credit and hire agreements entered into:
 wholly or predominantly for the debtor’s or hirer’s business purposes, where the
credit provided or hire payments to be made exceed £25,000
 with high net worth debtors or hirers, as set out in section 16A of the Act (the high
net worth individual requires to provide a statement of high net worth and a
declaration that he foregoes the usual protection)
Businesses will only be exempt if the business deals solely with exempt transactions.
Even if most of the business involves exempt transactions, if any part of the entity’s
normal business activities do not qualify as exempt, the business will still need a licence
GROUP LICENCES
Instead of a direct standard licence with the OFT, a group licence may be issued where
the OFT concludes that the public interest is better served by doing so, than by obliging
the businesss concerned to apply separately for numerous standard licences (the public
interest test).
Group licences are granted in terms that permit those covered by them to carry out
specified credit activities, but only within their role as part of the group.
The OFT grants group licences where it considers that the risk of consumer detriment,
arising from the activities of members of the group, is low. Currently there are two broad
categories of applicant that generally meet the criteria:
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advisory organisations with altruistic aims, and
professional bodies, with established disciplinary arrangements, who engage in
limited, low risk, credit activity as, an adjunct to their primary business.
Group licences will in general be issued for a five year period so as to enable the OFT to
regularly hold a full review of the performance of the group licence holder and its
membership.
If members of a group wish to engage in regulated consumer credit activities outside
their role as members of the group, they will additionally need to apply for a standard
licence direct with the OFT.
LICENCE ACTIVITIES
The Act identifies different consumer credit activities and a license holder needs to apply
for the particular activities that require to be conducted.
Category A: Consumer Credit Business
This covers a wide range of transactions, such as:
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hire purchase
issuing credit cards
budget accounts
instalment sales
cash loans
subscription accounts
trading checks
overdrafts
business loans.
A credit licence is not needed if the business only accepts credit cards issued by other
businesses. Hire purchase (finance lease) arrangements are under this category, and not
category B, because the agreement allows payment by instalment to purchase an asset.
Short term hire would be covered by Category B.
Category B: Consumer Hire Business
 This is for businesses hiring out, leasing or renting out goods under transactions that
are capable of lasting for more than three months;
 Hire purchase agreements do not fall within this category (they are category A)
 A category B licence is needed if:
o The business deals with consumers, sole traders, partnerships, or other
unincorporated bodies
o The agreements are capable of lasting for longer than three months, for
example, if a 12-week agreement is capable of extension.
 There will be some hire agreements that fall within the scope of the Act only under
certain circumstances e.g. if you make an agreement with a partnership of more than
three businesss it will not fall within the scope of the Act.
 A business that makes some hire agreements that fall within the Act, and some that
do not, still requires a licence.
Category C: Credit Brokerage
 Credit brokerage consists of introducing clients/customers seeking credit or goods
on hire to businesses that provide credit, or other credit brokers.
 Category C is needed not only by those who are normally regarded as brokers, such
as mortgage brokers, but also by retailers and those who introduce their customers or
clients to sources of credit in order to sell their own goods or services. This may be
the case, for example, in a hire purchase transaction, such as a car purchase, or where
a home improvement company recommends a particular credit provider.
 An introduction does not depend upon the broker forwarding the application to the
lender. A recommendation to deal with a particular lender amounts to credit
brokerage.
 It is also credit brokerage to introduce people to other credit brokers.
 Category C is not needed for accepting credit cards issued by someone else (ie notr
arranged by the business).
 This category is not needed merely to advertise other people’s credit or hire.
 Since 31 October 2004, introducing people to lenders or other credit brokers for a
first charge mortgage is regulated by the FSA.
Category D: Debt adjusting
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Required for those helping people with their debt problems by taking over their
debts or negotiating on their behalf (where the debts arise under consumer credit or
hire agreements)
Debt adjusting consists of:
o negotiating terms with the creditor on behalf of an individual for the
discharge of a debt, or
o taking over, in return for payments by the debtor, his obligation to
discharge a debt, or
o any similar activity concerned with the payment of a debt.
Since 31 October 2004, the FSA regulates those carrying on any of the above solely
for mortgage debts.
Category D2: Non-commercial Debt Adjusting
This limits a business to offering debt adjusting services on a non-commercial basis only
(e.g. as a charity). It is a criminal offence to carry out any activities that require Category
D if the licence only covers Category D2 permission.
Category E Debt Counselling
 Where a business advises individuals about how to discharge specific debts, they are
likely to need Category E (where the debts arise under consumer credit or hire
agreements).
 Since 31 October 2004, the FSA regulates debt counselling in relation solely to debts
due under mortgages.
Category E2 Non-commercial debt counselling
This limits a business to offer debt counselling services on a non-commercial basis only
(e.g. a charity). It is a criminal offence to carry out any activities that require Category E
with this restricted licence.
Category F Debt Collecting
 This category is needed if a business collects debts due to others, arising from credit
or hire agreements (whether regulated or exempt).
 Category F is not needed if:
o until October 2008, it merely collects debts owed to it, except where the
debts have been assigned to it;
o from 1 October 2008, it merely collects debts owed to it, including debts
assigned to it;
o it merely collects rent due under a normal tenancy agreement
o it only collects debts due from companies.
 Since 31 October 2004, the FSA regulates businesss collecting debts on mortgage
contracts.
Category G: Debt Administration
 A business will need to apply for Category G if, from October 2008, he/she carries
out activities (other than debt collection) relating to consumer credit or consumer
hire agreements on behalf of another business who is the creditor, including
someone to whom the agreement has been assigned (in the case of consumer credit),
or owner (in the case of consumer hire)
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This category is not needed when a business is acting in their own interest, for
example administering loans made by them that have not been assigned by a third
party.
A business can exercise and enforce the rights of the creditor or owner of the
consumer credit or consumer hire agreement under this category, as long as there is
nothing amounting to debt collecting (a Category F activity).
Category H1: Provision of Credit Information (including credit repair)
 From October 2008, a business will need this category if he/she wants to:
o seek to obtain information on behalf of an individual about his financial
standing (for example credit rating information), including asking a credit
reference agency if it holds the information
o provide advice to individuals on:
 how to seek to alter, or secure the omission of, the information
 how to seek to restrict the availability of the information
o seek to alter, or secure the omission of, information about an individual’s
financial standing
o seek to restrict the availability of the information.
 The business is classified as Category H1 if it intends to offer credit information
services with no limitation ie seek to alter, or secure the omission of, information
about an individual’s financial standing and/or seek to restrict the availability of the
information (the provision of credit repair* services) and providing such services on
a commercial basis.
 A business will probably not need this category if it simply provides free information
in a publicly available way, for example in books or websites.
Category H: Provision of Credit Information (excluding credit repair)
 This category applies from October 2008, and limits a business to providing
information services excluding the altering of, or securing the omission of,
information about an individual’s financial standing and/or seeking to restrict the
availability of such information (‘credit repair’).
Category H3: Provision of non-commercial credit information services (including
non-commercial credit repair)
 From October 2008, this category is needed where a person:
o seeks to obtain information on behalf of an individual about his financial
standing (for example credit rating information), including asking a credit
reference agency if it holds the information;
o provides advice to individuals on
– how to seek to alter, or secure the omission of, the information
– how to seek to restrict the availability of the information
o seeks to alter, or secure the omission of, information about an
individual’s financial standing, or
o seeks to restrict the availability of the information
on a non-commercial basis only.
 Category H1 or H will be needed for commercial activities
Category I: Credit Reference Agency
 This category is needed if a person wants to collect information about the
creditworthiness of people with a view to giving it to others
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This activity is subject to the requirements of the Consumer Credit (Credit Reference
Agency) Regulations 2000 and the specific provisions of the Consumer Credit Act
1974 and Data Protection Act 1998