Many advice problems occur over termination of hire purchase agreements where there is a linked agreement for some other service. This summary attempts to explain the issues as I understand them, and also some possible solutions. Obviously, only a County Court (or in Scotland the Sheriff's Court) can make a final decision, but these views are supported by the Office of Fair Trading.
Note that agreements made on or after 31 May 2005 will be subject to amended Agreement controls under the Consumer Credit (Agreements) (Amendment) Regulations 2004. As drafted these will allow for "gap" or "shortfall" insurance to be included within the range of agreements that can be included in a principal agreement, but do nothing to force separate agreements (although this was a proposal within the draft circulated by DTi).
However, there is an additional set of rules being brought in by FSA from February 2005 to cover the selling of general insurance policies. This will hopefully cover "gap" insurance and payment protection, but may not include warranties. I understand separate signatures will be required, and there will be a cooling off period. Watch this space! Anyway the rules at present are as follows.........
A. Firstly, the law:
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Regulation
2(7A) of the Consumer Credit (Agreements) Regulations 1983 Documents embodying a
debtor-creditor-supplier agreement falling within section 12(a) of the Act or
a debtor-creditor agreement (in this paragraph in either case referred to as
‘the principal agreement’) and also embodying, or containing the option of, a
debtor-creditor-supplier agreement falling within section 12(b) of the Act
(in this paragraph referred to as ‘the subsidiary agreement’) where the
subsidiary agreement is to finance a premium under either or both of: (a) a
contract of insurance to provide a sum payable in the event of one or more of
the following: (i) accident; (ii) sickness; (iii) unemployment; (iv) death
only, of a debtor before the credit under the principal agreement and the
subsidiary agreement has been repaid, where the sum payable does not exceed
the amount sufficient to defray the sums payable to the creditor in respect
of that credit and of the total charge for credit and where the policy monies
payable under the contract of insurance are to be used for a repayment under
the principal agreement and the subsidiary agreement; (b) any
other contract in so far as it relates to a guarantee of goods, may contain instead of the headings,
statements of the protection and remedies available to debtors under the Act
and signature boxes that would otherwise apply: (aa) a
heading and signature box in so far as they relate to the principal agreement; (bb) a
statement in Form 12 of Part I of Schedule 2 to these Regulations; and (cc) other
statements (other than in Form 14 of Part I of Schedule 2) of the protection
and remedies available to debtors under the Act in so far as they relate to
the principal agreement. |
In plain English, this amendment to the original Regulations provides that, where a principal debtor-creditor-supplier agreement (d-c-s) exists, and there is a subsidiary agreement for either life, accident, sickness or unemployment insurance, or for a guarantee on the goods, then the agreement may be drafted as just the principal agreement requires, rather than there being two separate agreements.
Thus if the principal agreement is one of hire-purchase or conditional-sale, then the heading, "your rights" paragraphs and signature box will refer to that agreement, rather than to any connected d-c-s agreement.
B. Next the problems, which fall into three distinct areas -
a.
consumers
being sold subsidiary agreements they do not need, incurring costs higher than
they have planned;
b.
consumers
terminating the principal agreement remain subject to any subsidiary agreement.
If they have bought a lump sum policy for insurance or guarantee then their
only right will be to pay the remainder of the costs of the subsidiary
agreement, less any available early settlement rebate
c.
consumers
being required to conclude the subsidiary agreement before being allowed to
terminate the principal agreement,
and I shall deal with each of these in turn.
There are clear
incentives for retailers to add on as many extras as possible with principal
supply contracts. For instance warranty agreements are rumoured to provide 80% of the premium as
commission, hence only 20% is available to pay out on claims.
I have seen a number of such agreements that include
"vehicle recovery"
policies,
"accident assistance"
policies, and
"gap insurance" - to cover
the loss of value received if, following an accident, the write-off is lower
than the amount due to the finance company.
None of these would fall within the exemptions in Regulation 2(7A).
Finally, the layout of such agreements may themselves be misleading, if for instance, a combined payment amount is shown, or termination details are shown under the wrong part of the agreement. However, watch out for clear paragraphs making it clear that only the goods part of the agreement is covered by termination.
Suggestion - the agreement is unenforceable except on a
court order. Strictly, the county court (or sheriff's court in Scotland) can
make such an enforcement order, so it will be up to the consumer to argue that
he or she has been prejudiced by any misleading nature of the transaction, as
outlined above. Also, lump sum insurance is criticised by the Office of Fair
Trading in their non-status guidelines (although
these are primarily aimed at non-regulated agreements).
I have referred a file of such agreements to the Office of Fair Trading and am
in ongoing correspondence with them.
In this case, the different entities providing
the parts of the deals often cause difficulties. In terminating the principal
hire purchase or conditional sale agreement, the creditor is bound to mitigate
his or her loss - he can only charge the lower of calculations performed using
settlement and termination.
This will do nothing to settle the subsidiary agreement. The consumer will have
purchased the lump-sum policy, and this will continue to run. There may be some
rebate for shortened use of the policy if the consumer terminates it, but this
is rarely provided. The consumer will however be required to pay a settlement
amount, and will get a rebate on the interest commitment under the subsidiary
agreement if it had run to term.
Because of the bad publicity faced by a few lenders over their current or recent trade practices, it is known that a few have begun to cease insurance policies at the point when the principal agreement is paid off.
Suggestion - pressure the lender, on the basis of the
link between the retailer (as their agent) and any insurance company (often
closely linked to the lender), to attempt consumer redress.
At least one lender is currently requiring a
cash settlement of the subsidiary agreement before allowing voluntary
termination by the consumer to take place. This does not comply with the terms
of Section 18, which states:
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(1) This
section applies to an agreement (a " multiple agreement") if its
terms are such as— (a) to place a part of it within one category of agreement
mentioned in this Act, and another part of it within a different category of
agreement so mentioned, or within a category of agreement not so mentioned,
or (b) to place it, or a part of it, within two or more categories of agreement so mentioned. (2) Where a part of an agreement
falls within subsection (1), that part shall be treated for the purposes of
this Act as a separate (3) Where an agreement falls within subsection (l)(b), it shall be
treated as an agreement in each of the categories in question, and this Act
shall apply to it accordingly. (4) Where under subsection (2) a part of a multiple agreement is to be
treated as a separate agreement, the multiple agreement shall (with any
necessary modifications) be construed accordingly; and any sum payable under
the multiple agreement, if not apportioned by the parties, shall for the
purposes of proceedings in any court relating to the multiple agreement be
apportioned by the court as may be requisite. (5) In the case of an agreement for running-account credit, a term of
the agreement allowing the credit limit to be exceeded merely temporarily
shall not be treated as a separate agreement or as providing fixed-sum credit
in respect of the excesses. (6) This Act does not apply to a multiple agreement so far as the agreement relates to goods if under the agreement payments are to be made in respect of the goods in the form of rent (other than a rent charge) issuing out of land. |
It is clear from paragraph (2) that each part of the agreement is to be treated separately. Accordingly, it cannot be a condition of termination of the principal agreement that the secondary contract is also terminated or settled.
Bob Imrie
This page updated 26 October 2004