Clause 4 - Exemption relating to businesses
Consumer Credit Bill
9:45 am
Mr Gerry Sutcliffe (Parliamentary Under-Secretary (Employment Relations, Competition and Consumers), Department of Trade and Industry; Bradford South, Labour)
I thank the hon. Gentleman for trying to be helpful. He has given me a quick breathing space to check what was appropriate to the debate.
The amendments would extend regulation of the Consumer Credit Act to consider all consumer credit agreements, regardless of the value or purpose of the loan. Although it is true that the Bill will abolish the financial limit for regulation under the Act, it does not do so across the board. It seeks to limit the protection afforded to loans taken out for business purposes by redefining a consumer credit agreement as an agreement where a debtor is an individual, an unincorporated association or a partnership of three or fewer partners. All loans to other borrowers, such as large partnerships and companies, are incapable of being regulated under the Act. This constitutes a narrowing of the existing definition under which all partnerships, regardless of their size, are able to conclude regulated agreements.
Clause 4 also distinguishes between the purposes for which these groups take out loans. The Bill would regulate any other loan—for whatever purpose—up to, and including a value of £25,000, the current limit in the Act. However, loans to those groups of more than £25,000 will not be regulated if they are made wholly or predominately for business purposes. Whether a loan of more than £25,000 is made wholly or predominately for business purposes will be a matter of fact in each case. However, where there is some doubt as to the purpose of the loan—for example, if it is made to finance the purchase of goods that have both a business and a private use—the borrower may make a declaration that the loan is wholly or predominately for business purposes. When such a declaration is given, the lender may rely upon it to draw up an unregulated agreement unless he knows, or has reasonable cause to suspect, that it is untrue.
Subsection (4) gives the Secretary of State the power to prescribe by order the form, content and signing arrangements of such declarations. The Bill aims to maximise protections granted to consumer borrowing by abolishing the existing financial limits in the Consumer Credit Act 1974. It also seeks to make it clear that lending for business purposes above £25,000 will ordinarily be excluded from regulation, and it excludes all but the smallest partnerships from the category of borrowers who can take out regulated consumer credit agreements.
The effect of the amendment would be to blur the clear policy line, and to bring within regulations a large number of business loans that are properly outside the ambit of the Act. It is important to remember that no protection is being removed from sole traders, small partnerships and unincorporated associations. The existing financial limits restrict regulations to £25,000 across the board, regardless of the purpose of the loan, and that protection will continue for those borrowers. Above that level, we expect borrowers to take advice commensurate with business risk, and they should not be treated as ordinary consumers.
The general position under the Bill is that business lending should be excluded from regulation. Limited exemptions apply to borrowing by sole traders, small partnerships and unincorporated associations, and all borrowing by them up to £25,000 is to be regulated. Borrowing over £25,000 can be regulated, but only if it is not wholly or predominantly for business purposes. It is important to remember that no protection is being removed from those borrowers. The existing financial limits restrict regulation to £25,000 across the board, regardless of the purpose of the loan.
There is no requirement for a declaration where it is clear because of the identity of the borrower, the nature of the finance or the circumstances of the agreement that the loan is wholly or predominantly for business purposes. Lenders may lend on regulated business terms without the comfort of a declaration if they are content to do so. In many cases, the lender and borrower will have a long-standing relationship, and the intention of each will be clear to the other. The declaration mechanism has been provided for the avoidance of doubt. While the intention of the parties is clear, some element of the agreement might subsequently call that into question. We decided that a declaration for a business purpose would create a presumption that the borrowing is for a business purpose, but if the creditor knows, or has reasonable cause to suspect, that the business purpose declaration is false or wrong, the agreement will be treated as a regulated agreement. We believe that those requirements mean that consumers will be properly protected against abuse of the provisions.
Clause 4 deals with exemptions from regulation of business lending under the 1974 Act, and to that effect, it inserts new section 16B into the Act. Hon. Members should note that when I say ''lending'' or ''credit'' when talking about this clause, I also mean ''hire''. Clause 2 will have the effect of removing the financial limits below which credit is not regulated under the Act. That means that, in future, credit of any amount made available to consumers will be regulated, except where specifically exempted under the Act. The new subsection (1) provides one such exemption. It states that the Act does not regulate a consumer credit or consumer hire agreement worth more than £25,000 where that agreement is entered into wholly or predominantly for a business purpose. Agreements for business purposes for £25,000 or less will continue to be regulated under the Act, as I have explained. The effect of clause 1 is that, in future, that provision will apply only where the borrower is a sole trader, an unincorporated association or a partnership of three or fewer partners.
''Business purposes'' is not defined; we believe that to do so would be unhelpful. That would either exclude from regulation some consumer transactions or mean that many transactions that are for business purposes would continue to be regulated. The best people to determine the purpose of the credit are the parties to the agreement. The new subsection (2) provides that a person can make a declaration as part of the agreement that the credit is either wholly or predominantly for a business purpose. Such a declaration will give rise to a presumption that the borrowing is for a business purpose. Under the new subsection (3) the presumption will not apply if the lender or a person acting on his behalf knows or reasonably suspects that the credit is not wholly or predominantly for a business purpose.
The new subsection (6) provides that where an agreement involves more than one lender, such knowledge on the part of one of them will bind them all. The Secretary of State may, under the new subsection (4), make regulation setting out the form and content of the declaration as to a business purpose. New subsection (5) specifies who may make declarations about business purposes on behalf of partnerships and unincorporated associations. New subsection (7) states that business borrowers are not prevented from applying to reopen the agreement on the basis that it flows from an unfair relationship.