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CONC 4.2 Pre-contract disclosure and adequate explanations

Application

CONC 4.2.1RRP

This section, unless otherwise stated in or in relation to a rule:

  1. (1)

    applies to a firm with respect to consumer credit lending;

  2. (2)

    applies to a firm with respect to credit broking where the firm has or takes on responsibility for providing the disclosures and explanations to customers required by this section;

  3. (3)

    does not apply to an agreement under which the lender provides the customer with credit which exceeds £60,260;

  4. (4)

    does not apply to an agreement secured on land; and

  5. (5)

    does not apply to a borrower-lender agreement enabling the customer to overdraw on a current account other than such an agreement which would be an authorised non-business overdraft agreement, but for the fact that the credit is not repayable on demand or within three months.

    [Note: section 74(1D) of CCA]

CONC 4.2.2GRP

For the agreements referred to in CONC 4.2.1R (3), (4) and (5), a firm within CONC 4.2.1R (1) or CONC 4.2.1R (2) should consider whether it is necessary or appropriate to provide explanations of the matters in CONC 4.2.5R (2); in particular, a firm should consider highlighting the principal consequences to the customer including the consequences of missing payments or under-paying, including, where applicable, the risk of repossession of the customer's property.

[Note: section 55A(6) of CCA and paragraphs 3.1(box) of ILG and 3.5 of SCLG]

Other disclosure requirements

CONC 4.2.3GRP
  1. (1)

    The disclosure regulations made under section 55 of the CCA which require information to be disclosed before a regulated credit agreement is made remain in force.

  2. (2)

    Failure to comply with the disclosure regulations has the effect that agreements are enforceable against a borrower or hirer (as defined in the CCA) only with an order of court and enforcement for that purpose includes a retaking of goods or land to which the agreement relates.

  3. (3)

    Other relevant disclosure requirements are found in CONC 2.7 (distance marketing) and CONC 2.8 (electronic commerce), the Financial Services (Distance Marketing) Regulations 2004 (SI 2004/2095), the Electronic Commerce (EC Directive) Regulations 2002 (SI 2002/2013) and the Consumer Protection from Unfair Trading Regulations 2008 (SI 2008/ 1277) and the Cancellation of Contracts made in the Consumer’s home etc Regulations 2008 (SI 2008/1816).

CONC 4.2.4GRP

The pre-contractual information disclosed under the disclosure regulations and the pre-contractual explanations required under CONC 4.2.5 R should take into account any preferences expressed, or information provided by, the customer where the firm would in principle agree to offer credit on such terms

[Note: paragraph 3.13 (box) of ILG]

Pre-contractual adequate explanations

CONC 4.2.5RRP
  1. (1)

    Before making a regulated credit agreement the firm must:

    1. (a)

      provide the customer with an adequate explanation of the matters referred to in (2) in order to place the customer in a position to assess whether the agreement is adapted to the customer's needs and financial situation;

    2. (b)

      advise the customer:

      1. (i)

        to consider the information which is required to be disclosed under section 55 of the CCA; and

      2. (ii)

        where the information is disclosed in person, that the customer is able to take it away;

    3. (c)

      provide the customer with an opportunity to ask questions about the agreement; and

    4. (d)

      advise the customer how to ask the firm for further information and explanation.

      [Note: section 55A(1) of CCA]

  2. (2)

    The matters referred to in (1)(a) are:

    1. (a)

      the features of the agreement which may make the credit to be provided under the agreement unsuitable for particular types of use;

    2. (b)

      how much the customer will have to pay periodically and, where the amount can be determined, in total under the agreement;

    3. (c)

      the features of the agreement which may operate in a manner which would have a significant adverse effect on the customer in a way which the customer is unlikely to foresee;

    4. (d)

      the principal consequences for the customer arising from a failure to make payments under the agreement at the times required by the agreement including, where applicable and depending upon the type and amount of credit and the circumstances of the customer:

      1. (i)

        the total cost of the debt growing;

      2. (ii)

        incurring any default charges or interest for late or missed payment or under-payment;

      3. (iii)

        impaired credit rating and its effect on future access to or cost of credit;

      4. (iv)

        legal proceedings, including reference to charging orders (or, in Scotland, inhibitions), and to the associated costs of such proceedings;

      5. (v)

        repossession of the customer's home or other property; and

      6. (vi)

        where an article is taken in pawn, that the article might be sold, if not redeemed; and

    5. (e)

      the effect of the exercise of any right to withdraw from the agreement and how and when this right may be exercised.

      [Note: section 55A(2) of CCA and paragraph 3.13 of ILG]

  3. (3)

    The adequate explanation and advice in (1) may be given orally or in writing, except where (4) applies.

    [Note: section 55A(3) of CCA]

  4. (4)

    Where the matters in (2)(a), (b) or (e) are given orally or to the customer in person, the explanation of the matters in (2)(c) and (d) and the advice required in (1)(b) must be given orally to the customer.

    [Note: section 55A(4) of CCA]

  5. (5)

    Paragraphs (1) to (4) do not apply to a lender if a credit broker has complied with those sub-paragraphs in respect of the agreement.

    [Note: section 55A(5) of CCA]

  6. (6)

    Where the regulated credit agreement is an agreement under which a person takes an article in pawn:

    1. (a)

      the requirement in (1)(a) only relates to the matters in (2)(d) and (e); and

    2. (b)

      the requirements in (1)(b) and (d) do not apply.

      [Note: section 55A(7) of CCA]

  7. (7)

    This rule does not apply to:

    1. (a)

      a non-commercial agreement;

    2. (b)

      a small borrower-lender-supplier agreement for restricted-use credit

      [Note: section 74(1) of CCA]

  8. (8)

    Where this rule applies to a borrower-lender agreement to finance the making of payments arising on or connected with the death of a person, the payments in question are set out in (9).

    [Note: section 74(1F) of CCA]

  9. (9)

    The payments referred to in (8) are:

    1. (a)

      inheritance tax chargeable in the UK on the death of any person;

    2. (b)

      fees payable to a court:

      1. (i)

        in England, Wales or Northern Ireland on an application for a grant of probate or of letters of administration;

      2. (ii)

        in Scotland, in connection with a grant of confirmation; and

      3. (iii)

        in the UK, on an application for resealing of a Commonwealth or colonial grant of probate or of letters of administration; and

    3. (c)

      payments in England, Wales or Northern Ireland to a surety in connection with a guarantee required as a condition of a grant of letters of administration or payments in Scotland to a cautioner in connection with a bond of caution required as a condition of issuing a grant of confirmation.

      [Note: regulation 2 of SI 1983/1554]

[Note: article 5(6) of the Consumer Credit Directive]

CONC 4.2.6GRP

The explanation provided by a lender or a credit broker under CONC 4.2.5 R should enable the customer to make a reasonable assessment as to whether the customer can afford the credit and to understand the key associated risks.

[Note: paragraph 3.3 (box) of ILG]

CONC 4.2.7GRP

In deciding on the level and extent of explanation required by CONC 4.2.5 R, the lender or credit broker should consider (and each of them should ensure that anyone acting on its behalf should consider), to the extent appropriate to do so, factors including:

  1. (1)

    the type of credit being sought;

  2. (2)

    the amount of credit to be provided and the associated cost and risk to the customer (the risk to the customer is likely to be greater the higher the total cost of the credit relative to the customer's financial situation);

  3. (3)

    to the extent it is evident and discernible, the customer's level of understanding of the explanation provided; and

  4. (4)

    the channel or medium through which the credit1 transaction takes place.

    [Note: paragraph 3.4 of ILG]

    1
CONC 4.2.8RRP

Where the regulated credit agreement is high-cost short-term credit, the lender or a credit broker must explain under CONC 4.2.5R (1)(a) that entering into that agreement would be unsuitable to support sustained borrowing over long periods and would be expensive as a means of longer term borrowing.

[Note: paragraph 3.13 (box) of ILG]

CONC 4.2.9RRP

Even where a customer states or implies that there is no need for an explanation of the regulated credit agreement, the lender or credit broker must continue to comply with CONC 4.2.5 R.

[Note: paragraph 3.10 of ILG]

CONC 4.2.10RRP

A lender or a credit broker must not encourage or induce a customer to waive the rights in CONC 4.2.5 R.

[Note: paragraph 3.10 of ILG]

CONC 4.2.11RRP

Before a lender concludes that CONC 4.2.5R (1) to CONC 4.2.5R (4) do not apply to it in relation to a regulated credit agreement by virtue of CONC 4.2.5R (5), the lender must take reasonable steps to satisfy itself that an explanation of that agreement complying with CONC 4.2.5 R has been provided to the customer by the credit broker.

[Note: paragraph 3.11 (box) of ILG]

CONC 4.2.12RRP

The lender or the credit broker must enable a customer to request and obtain further information and explanation about a regulated credit agreement without incurring undue cost or delay.

[Note: paragraph 3.16 (box) of ILG]

CONC 4.2.13RRP

Neither a lender nor a credit broker may require a customer to acknowledge that the information and explanations it has provided are adequate to satisfy the requirements of CONC 4.2.5 R.

[Note: paragraph 3.30 (box) of ILG]

CONC 4.2.14GRP

A lender or credit broker may require an acknowledgement that it has provided an explanation, and of receipt of any written information that forms a part of the explanation, but not an acknowledgement as to its adequacy. CONC 4.2.13 R does not prevent the lender or credit broker asking if the customer has understood an explanation given.

[Note: paragraph 3.30 (box) of ILG]

Adequate explanations in relation to particular regulated credit agreements

CONC 4.2.15RRP

The following information must be provided by the lender or a credit broker as part of, and in addition to that provided under, the adequate explanation required by CONC 4.2.5 R, where applicable, in the specified cases:

  1. (1)

    for credit token agreements:

    1. (a)

      different rates of interest and different charges apply to different elements of the credit provided (for example, a higher cost of withdrawing cash);

    2. (b)

      the implications of only making minimum repayments;

    3. (c)

      interest rates or charges2 may be increased;

    4. (d)

      where applicable, the interest rates may be increased based on the risks presented by the individual customer;

    5. (e)

      the limitations on any zero percentage or low interest or other introductory offer; and

    6. (f)

      conditions on any balance transfers, including any fees and charges which may apply;

  2. (2)

    for credit card cheques, the higher associated costs relative to payment by credit card;

  3. (3)

    for home credit loan agreements and high-cost short-term credit, the effect of refinancing (within the meaning in CONC 6.7.17 R) or otherwise extending the duration of the credit or of the credit agreement;

  4. (4)

    for bill of sale loan agreements:

    1. (a)

      the risk of losing the asset which is the subject of the bill of sale and the loss this could entail;

    2. (b)

      that repossession can take place without a court order;

    3. (c)

      that repossession may not clear the debt owed; and

    4. (d)

      unlike in the case of hire-purchase agreements and conditional sale agreements, the customer is not protected under this arrangement from repossession of the asset where one third or more of the total amount payable has been paid off;

  5. (5)

    for hire purchase agreements and conditional sale agreements:

    1. (a)

      the customer does not own the goods until the sums required under the agreements have been paid, including any option to purchase fee and any other conditions have been satisfied;

    2. (b)

      goods can be repossessed without a court order in the event of default, unless in relation to a regulated credit agreement the customer has paid a third or more of the total amount payable;

  6. (6)

    for a credit agreement which is used to consolidate existing debts of the customer (whether to the same lender or to another person) and where applicable in each case:

    1. (a)

      the effect of consolidating the debts will involve payment of a higher rate of interest or charges or both (if the relevant information about existing debts is known to the lender or credit broker);

    2. (b)

      the effect of consolidating the debts will involve increasing the period required for repayment (if the relevant information about existing debts is known to the lender or credit broker); and

    3. (c)

      the credit agreement would be secured on the customer's property;

  7. (7)

    for a credit agreement which includes a condition requiring a guarantor, the requirement for the customer to provide security in the form of a guarantee.

[Note: paragraph 4.26c of CBG]

[Note: paragraph 3.13 of ILG]

CONC 4.2.16GRP

Where a customer does not have a good understanding of the English language, the lender or credit broker may need to consider alternative methods of providing relevant information concerning the explanation required by CONC 4.2.5 R in order for the customer to make an informed decision, such as, providing the information to a person with such understanding who can assist the customer, for example, a friend or relative.

[Note: paragraph 3.4 (box) of ILG]

Guidance for adequate explanations where agreements are marketed by distance or electronic means

CONC 4.2.17GRP

Since the use of distance means of communication (such as the internet) by their nature limit the lender's or credit broker's ability to ascertain the customer's level of understanding of explanations provided, a lender or credit broker using those means may, for example, wish to provide local rate telephone number for customers who wish to seek further explanation.

[Note: paragraph 3.6 (box) of ILG]

CONC 4.2.18GRP

Interaction is an important part of compliance with the requirement in CONC 4.2.5R (1), for example, where the agreement is marketed and concluded by electronic means. For an online application, the requirement in CONC 4.2.5R (1)(c) (the right to ask questions) may be complied with by the customer being able to access an appropriately comprehensive set of answers to frequently asked questions about the agreement or by being able to speak to a representative of the online provider.

[Note: paragraph 3.8 (box) of ILG]

CONC 4.2.19GRP

For a regulated credit agreement marketed and concluded by electronic means to comply with CONC 4.2.5 R the customer should pass through screens containing the required information and explanations, giving the customer the opportunity to see and read the explanations provided. Merely providing a link to where such information can be found is unlikely to satisfy the requirements in CONC 4.2.5 R, where the agreement can be concluded without accessing the link.

[Note: paragraph 3.15 (box) of ILG]

CONC 4.2.20GRP

For telephone or face-to-face transactions, interaction between the customer and the firm's representative is also important. It should be made clear to the customer that the customer can ask questions or request further information or explanation and, for example, the representative solely providing the customer with a written explanation of an agreement, or relying solely on a written script in relation to an agreement, is unlikely to comply with the requirement in CONC 4.2.5 R.

[Note: paragraph 3.9 (box) of ILG]

CONC 4.2.21GRP

Where a regulated credit agreement is a modifying agreement under section 82(2) of the CCA, the requirements in CONC 4.2 apply before the agreement is made.

[Note: paragraph 3.12 of ILG]