If you do business with consumers in the United Kingdom and those consumers borrow to pay for the goods or services you will very likely need a Consumer Credit Licence. In this article, we explain why and point you in the right direction to obtain advice and that licence if you need it. Most EU Member States have had laws governing consumer credit for a considerable time. However, the current EU Directive 87/102/EEC "for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit" only sets certain minimum standards that the Member States must implement.

Because harmonisation is not complete, a licence obtained in one Member State cannot be used for doing business in another. Also, the specific requirements, which trigger the need for licences and permissions, vary from one Member State to another. This article, therefore, concentrates on the UK.

Do You need a Consumer Credit Licence?
If your business does any of the things on the following list you will no doubt be aware that you need a Consumer Credit Licence:

• selling on credit to consumers
• hiring or lease out goods for more than 3 months to consumers
• lending money to consumers
• issuing credit cards or trade cheques
• offering hire-purchase terms to consumers

A licence is also required if you are involved in collection of consumer credit debts, helping individuals with debt problems or advising on people's creditworthiness.

However, there is a very important further category that is often overlooked because it is less obvious. If you introduce consumers to a potential source of credit, you will be regarded as a "credit broker" under the Consumer Credit Act 1974. If they deal with consumers, credit brokers must also have consumer credit licenses.

You are still a credit broker even if you are making a credit introduction in the context of selling something else. An obvious example is the car dealer who refers his customer to a third party financier. He is not lending the money himself but that introduction is enough to bring him within the scope of consumer credit law. Of course the same thing applies to all other sectors except in relation to transactions in land, which are caught under the Financial Services legislation.

You should bear in mind also that consumer credit licences come in a variety of "flavours" - in other words, they are granted for the specific business categories requested in the application. Therefore, you do not just have to have a licence. It has to be in respect of each category of consumer credit business you are involved in. If you change the type of consumer credit activities you carry out, you must first apply to amend your Consumer Credit Licence.

Consequences of not having a Licence
If you are tempted to ignore this problem, you are not alone but beware. There are real consequences for trading without the appropriate licence.

First, doing so is a criminal offence with fines up to £50,000 and/or imprisonment for up to two years.

Almost as important is that the contracts you make whilst trading without the correct licence are unenforceable - you cannot recover monies due from the customer. Imagine "selling" a car to a customer without the right licence and finding he does not need to pay for it at all!

In short, if you deal with consumers, think about whether you might need a Consumer Credit Licence and if you already have one consider whether it covers all the right business categories.

How do You obtain a Consumer Credit Licence?
You are required to complete a form which is available online or by application to the Office of Fair Trading. You will need to provide details of your business and the people involved and pay a fee. That fee varies from time to time, but is currently £230 for a sole trader and £575 for a company, partnership or other organisation. You must also pay a £150 industry levy which funds the Financial Ombudsman's Consumer Credit role.

The licence is granted indefinitely but a fee is payable every five years. You can vary the terms of your Licence by applying to the Office of Fair Trading. If these variations are made at the date of a renewal they will be free of charge but at other times there may be a fee.

The Office of Fair Trading can consider anything it thinks is relevant when it decides whether to grant a Licence, but in particular it looks at the following factors:

• your skills, knowledge and experience (or those of anyone else in your business)
• your practices and procedures
• any evidence that a person likely to be involved in your consumer credit business is unfit

The Consumer Credit Act 2006 has extended the Office of Fair Trading's discretion in whether to grant a Licence. It can now base a decision on likely future behaviour, as well as past conduct.

Once you have your Consumer Credit Licence you must maintain your standards. If the Office of Fair Trading thinks you are not doing so, it can revoke, suspend or change the terms of your Licence at any time. To protect against this your business should have appropriate policies and procedures in place and your staff should be trained in them.

The requirement for a Consumer Credit Licence is very wide-ranging and getting practices and policies right is very important. If you would like further help, we will be very happy to provide this. Please contact Peter Manford on +44 (0)870-763 1390 e-mail peter.manford@martjohn.com.

Copyright UK Business Club 2008
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