Many firms were delighted at amendments to legislation made in March 2015 by HM Treasury in respect of the low payments exemption under the consumer credit regime. It means that firms offering (and broking) fixed sum credit linked to the supply of goods or services payable by no more than 12 instalments within 12 months, and which is without interest and other charges, will not now involve a consumer credit regulated activity.  Previously the maximum number of payments was capped at four.

Whilst the original exemption (made in 1989) was only ever intended to apply to short term trade credit the extension is of particularly benefit to the insurance industry where premiums are spread over a year. Indeed the insurance sector lobbied hard for the change. This might have been partly down to the realisation that many insurance firms would otherwise need to be fully Financial Conduct Authority (FCA) authorised just for this activity and that some were probably already offering credit that fell outside the existing exemptions and did not have an interim permission.

One particular quirk of the exemption, (which was previously in the old consumer credit legislation) relates to the maximum repayment period. The FSMA [1] Regulated Activities Order requires the payments “to be made within a period of 12 months or less (beginning on the date of the agreement)”.

The period for the 12 month exemption begins on the date of the agreement. It follows that an agreement made on 10 September 2015 payable by 12 instalments each payable on the 10th of the month will not be exempt. This is because the final instalment payable on 10 September 2016 will be made a year and a day after the agreement was made.

It might seem pedantic to scrutinise the legislation down to this level of detail but unless the exemption is applied correctly then this will have ramification for firms. Indeed there has been case law in respect of the application of the 12 month repayment period where lenders were caught out by this provision. See for example the Court of Appeal judgment [2] which applied the 12 month rules strictly concerning the previous exemption[3].

Lenders could therefore be inadvertently caught out by this exemption and it is perhaps disappointing that HM Treasury, in attempting to offer a proportionate regime did not fully consider its practical application. Indeed the FCA on its website summary of the extended exemption, whilst seeking to assist and inform firms, is silent on this potential pitfall.

Firms therefore need to give careful consideration as to how their agreements spread over 12 months are in fact drafted to ensure they remain exempt.

For more information, email blogs@gateleyplc.com.

[1]  Article 60F, Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544); http://www.legislation.gov.uk/uksi/2001/544/contents/made

[2] Ketley v Gilbert [2000] EWCA Civ 354                   

[3] Article 3(1) of the Consumer Credit (Exempt Agreements) Order 1989

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.