2. FB's writings on Law

2.6. FB's writings on Consumer Credit Law

2.6.4. FB's articles on Consumer Credit Law

1999.004 ‘Multiple agreements under the Consumer Credit Act s.18’ (continued)

......................agreement by separating out the terms referable to each article under the provisions of section 18.

So we see that section 18 does not restrict the parties in the way they set out their document. It is dealing with the substance, rather than the form, of the transaction. References in it to parts of an agreement are references to different aspects or features of the agreement. They do not refer to the layout of the agreement on paper. As Guest and Lloyd say, ‘the answer does not depend on whether the parties have literally divided the agreement into parts’.14 The whole/part differentiation is a notional one. It relates to the legal effect of an agreement. Nevertheless the provisions of section 18 do of course have an impact on the various statutory requirements as to form. So far as these requirements relate to a particular CCA category within which the document or any part of it falls, the document must comply with them. This applies to every relevant CCA category. However the point to grasp is that it does not matter if, from the point of view of a particular CCA category, the document contains irrelevant material (needed to comply with documentation requirements directed to some other category).

Professor Goode’s error

Professor Goode’s erroneous position can be described as follows. Basing himself on section 18(1), he coins two terms not found in the Act, namely ‘multipart agreement’ and ‘unitary agreement’. These are rooted in the (mistaken) supposition that an agreement must either be within paragraph (a) of the subsection or paragraph (b), but cannot be within both. According to Professor Goode a ‘multipart agreement’ is within paragraph (a) and a ‘unitary agreement’ within paragraph (b). He says that section 18 ‘draws a clear distinction between an agreement in parts each of which is in a different category and a unitary agreement falling within two or more statutory categories’.15 He says that a loan agreement is a multipart agreement where the part of the loan which is to be applied for one purpose is repayable on terms or in a manner different from the terms or manner applicable to the part or parts to be applied for other purposes.16 In other words a loan agreement is a multipart agreement only where it has two or more purposes and the repayment conditions for these differ. It is a unitary agreement, says Professor Goode, if ‘the terms of the agreement as to interest and repayment apply to the loan as a whole without differentiation between one component and the other or others . . . By contrast, where the part of the loan which is to be applied for one purpose is repayable on terms or in a manner different from that applicable to the part or parts to be applied for other purposes, the loan agreement will be a multipart agreement and each will be considered a separate agreement’.17 Professor Goode’s Examples 1 and 2 show a £10,000 loan for a non-exempt purpose being tacked on to one of £20,000 for an exempt purpose.18 According to Professor Goode’s analysis the former loan escapes control if the repayment conditions for the two are the same but not if they differ.

Professor Goode’s analysis breaks down at the first hurdle. It depends on the proposition that an agreement cannot fall within both section 18(1)(a) and section 18(1)(b), but as explained above this is not so: an agreement may well fall within both paragraphs. A further example may be helpful in demonstrating this. A contract is made between Mr A and Mr B (acting in the course of his business). Under its terms Mr B agrees to lend Mr A £200 and also hire him a car for six months at £100 a month. The moneylending part of the contract is treated by section 18 as a separate consumer credit agreement, while the hiring part is treated by it as a separate consumer hire agreement. On the other hand the entire agreement is a regulated agreement. So from the point of view of the provisions of the Act relating to consumer credit agreements and consumer hire agreements the contract is a multiple agreement, while from the point of view of the provisions relating to regulated agreements it is not.

There are further objections to Professor Goode’s thesis. It is inconsistent with Professor Guest’s correct statement, quoted above, that the form of the agreement is irrelevant. It is also inconsistent with Professor Goode’s own admission that one objective of section 18 is ‘to ensure that the Act (and in particular the £25,000 ceiling on its application) is not avoided by artificially combining distinct bargains, one or more of which would be within the statutory ceiling,19 into a single agreement above the ceiling’. It is an invitation to the sort of avoidance by creating insignificant distinctions that section 18 was obviously designed to prevent. It also ignores the fact that section 18 is concerned with different CCA categories. If disparate repayment conditions for two parts of a loan both fit within the CCA category occupied by the loan agreement (as they usually would do) it is irrelevant for the purposes of section 18 that repayment conditions are different.20 Professor Goode’s definition of ‘multipart agreement’ is both too wide and too narrow. It is too wide in making one type of agreement, namely an agreement containing differing repayment conditions but falling within only one CCA category, a multipart agreement when it is not in that respect a multiple agreement at all. It is too narrow in saying that another type of agreement, namely one which has uniform repayment conditions but parts of which fall within different CCA categories, is not a multiple agreement.

By being too wide, Professor Goode’s definition could turn some unregulated agreements into apparent regulated agreements. This would do no harm to consumers, but would cause credit or hire traders unnecessarily to complicate their transactions by complying with the Act’s documentation requirements when they did not need to. By being too narrow, the definition could cause harm to consumers. This it would do by negating the true effect of section 18 in relation to an agreement which was in fact a ‘multipart agreement’ but was outside Professor Goode’s definition. So a part which should be treated as a separate regulated agreement, and therefore subject to the Act’s documentation requirements, would appear to escape regulation. On a correct application of section 18, however, such an agreement does not really escape regulation; so, if the documentation requirements were not complied with the agreement would be improperly executed. Under section 65(1), a court order would be required before the agreement could be enforced by the trader. Under section 127 the court could refuse to make this order, or could reduce the amount otherwise payable by the customer.

A worked example

I conclude with a fully worked example concerning the sort of transaction that readers are likely to encounter in practice. A mortgage company (M) wishes to float a Scheme under which it would offer its existing borrowers a further advance facility combined with refinancing. M wants to call this a ‘Topup Loan’. While the loan under the original mortgage would be outside the Act either because its amount exceeded the statutory limit or because it would be an exempt agreement under the combined effect of section 16 and the Consumer Credit (Exempt Agreements) Order 1989, the further advance under the Scheme would in most cases be of an amount below £25,000 and for a non-exempt purpose. Nevertheless M wishes the Act not to apply.

In this connection it is pertinent to note that, by virtue of article 2(2)(c) of the 1989 Order, a debtor-creditor agreement secured by a land mortgage to refinance any existing indebtedness of the debtor, whether to the creditor or another person, under any agreement by which the debtor was provided with credit for the purchase of land (including, by virtue of the Interpretation Act 1978 sections 5 and 23(1) and Schedule 1, buildings on the land) is an exempt agreement. By virtue of the Interpretation Act 1978 section 11 and the definition of ‘finance’ in section 189(1) of the 1974 Act, the term ‘refinance’ here means refinance wholly or partly.

Within the meaning of the Consumer Credit Act the proposed Topup Loan would wholly refinance the outstanding obligations under the existing mortgage, but it would also provide an additional loan by way of further advance which, as stated above, would in many cases be of an amount below £25,000 and for a non-exempt purpose. The borrower would be required by a term of the agreement to use the refinancing element to pay off the earlier mortgage. Therefore that element would be for restricted-use credit within the meaning of section 11. On the other hand the further advance element would be for unrestricted-use credit.

In such a case the agreement for the Topup Loan would be a multiple agreement within the meaning of section 18. It would be partly (so far as it refinanced the original mortgage) either an exempt agreement or outside the monetary limit of £25,000 and partly (so far as it provided a further advance not exceeding £25,000) a regulated agreement subject to the Act’s rules as to documentation etc. It would also be partly for restricted-use credit and partly for unrestricted-use credit. By apportionment under section 18(4) the deemed separate refinancing agreement would have the relevant parts of sums specified in the actual agreement, such as the principal and interest payments, allocated to it. The same would apply to the deemed separate further advance agreement.

Thus a Topup Loan would be wholly within (1) the CCA category of ‘personal credit agreement’, (2) the CCA category of agreement for ‘fixed-sum credit’ and (3) the CCA category of ‘debtor-creditor agreement’. However only the part dealing with refinancing would be within the CCA category of ‘exempt agreement’. Again, only this refinancing element would be within the CCA category of ‘restricted-use credit agreement’. Only the element relating to the further advance would be within the CCA categories of ‘regulated agreement’ and ‘unrestricted-use credit agreement’. It follows that, no matter how the proposed Topup Loan agreement is worded, it must be a Class 1 agreement. The refinancing part and the further advance part must each be treated for the purposes of the Act as a separate agreement. Making the repayment and interest provisions identical for both types of credit would not, as Professor Goode would have us believe, turn it into a unitary agreement exempt from the Act.

My analysis is confirmed by Example 16 in Schedule 2 to the Act.21 The example concerns the issue of a credit card for use in obtaining on credit either cash or goods. The analysis attached to this statutory example says that so far as it relates to goods the agreement is to be treated as a separate debtor-creditor-supplier agreement, while so far as it relates to cash it is to be treated as a separate debtor-creditor agreement. In defence of his own analysis, Professor Goode finds himself compelled to say that Example 16 is erroneous. He also says that Example 18 is erroneous!22 That statutory examples are admitted by him to be inconsistent with Professor Goode’s own analysis might rather be thought an indication that it is the latter that is out of keeping with the legal meaning and intention of the Act.

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14. Encyclopedia of Consumer Credit Law, notes to section 18.
15. Consumer Credit Legislation, paragraph 559 - though he accepts that where it is a multipart agreement, one of the parts could then be a unitary agreement falling within one or more categories. In that situation he coins the expression ‘mixed multipart agreement’ to describe the overall agreement (paragraphs 559 and 571).
16. Consumer Credit Legislation, paragraph 2419.
17. Consumer Credit Legislation, paragraph 2419. The concept of a ‘unitary agreement’ is also used by Guest and Lloyd, who in their Encyclopedia of Consumer Credit Law refer in their notes to section 18 to the case where ‘the agreement is a unitary agreement, not in parts’.
18. Consumer Credit Legislation, paragraph 2419.

19. Consumer Credit Legislation, paragraph 558.1.
20. This is why MIRAS is irrelevant under section 18.

21. It is stated in section 188(1) that these examples ‘shall have effect for illustrating the use of terminology employed in this Act’.
22. Consumer Credit Legislation, paragraph 564.