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OFT warns lenders over misleading consumers if their debts are unenforceable

Wednesday, 9th December 2009

New update 10 December 2009

032-magnifyConsumers that are hoping to write of their debts, claiming they are unenforceable, will soon know their fate following a recent test case hearing in the Manchester High Court.

Judge Waksman, who is presiding over the hearing, is expected to announce his findings in early January.

The case mainly centres on whether consumers should pay their debts if the lender fails to produce an original agreement within a certain time limit of the request.

If the Court supports the consumer then the lenders may be forced to write the debts off, however if the Court favours the lenders then many thousands of consumers will be forced to pay up for their debts.


The Consumer Credit Act 1974 (The Act) was brought in to safeguard the public from unscrupulous lenders. It requires most businesses that offer goods or services on credit or lend money to consumers to be licensed by the Office of Fair Trading. Trading without a licensing arrangement is a criminal offence and can result in a fine and/or imprisonment.

The Act also requires certain credit and hire arrangements to be set out in a particular way and to contain certain information in order to be enforceable.

Until 6 April 2008, credit agreements were excluded from control if the amount of credit or hire exceeded £25,000. However, this financial limit was removed for all new credit and hire agreements by the Consumer Credit Act 2006.

Pre-existing agreements above £25,000 remain outside CCA regulation.

The Act was so worded that if lenders did not comply with the provisions of the Act, they would be unable to enforce repayment of the loan in a court.

It was not, however, the intention to trip up major banks or credit card companies which may have unintentionally failed to observe all the rules by not containing the prescribed wording and render their credit agreements unenforceable.

Claims made by Claims Management Companies 

It is estimated that 100,000 -150,000 consumers are currently employing either a solicitor or Claim Management Company (CMC) to see if they can get any credit cards and personal loans written off through various so called legal loopholes. Many consumers pay up front fees between £195 and £495 per agreement, in the hope they will become debt free. As a result many firms have sprung up claiming, on their websites or in their advertisements, to be able to get consumers out of credit card or personal loan debt. Much of the hype and information surrounding this issue is incorrect or misleading.

There are companies claiming that 80% of agreements are unenforceable and they will want to charge consumers a fee to get rid of their debt, sometimes charging a percentage of the amount they have 'saved'.  Some may also claim to get consumers compensation. These companies should not be giving guarantees or making promises to get consumers out of their debt and consumers have been asked by the Ministry of Justice, which monitors claims management companies, to report to them any which are operating in an unacceptable way. 

Whilst in certain circumstances some agreements may be unenforceable, many are. If consumers mistakenly believe their agreement is unenforceable and are not making repayments then they may be incurring additional default charges and legal costs and they could have their credit file marked as non-payment and be issued with a default notice. This will seriously impair a consumer’s credit file for six years and is what happened as a result in the recent big case of the Royal Bank of Scotland and Philip McGuffick. This said lenders have the right to threaten legal action if a loan is enforceable and the customer refuses to pay up. Also the lender can mark the consumer’s credit file as unpaid.

Office of Fair Trading (OFT)

Some of the claims promoted by the CMCs clearly conflict with the OFT's guidance which says that it is legal and acceptable for a bank that has lost the original loan agreement, or whose copy is illegible, to supply an accurate reconstituted version instead in order to demonstrate that the agreement did in fact contain the information specified by the Consumer Credit Act.

The regulator points out to lenders that they are acting unfairly and potentially in breach of their consumer credit licenses if they misled borrowers by:

• hiding or disguising the fact that there was never a proper signed agreement in the first place

• providing only a copy of the current terms and conditions, not the original ones

• confusing the borrower as to who they should send an information request after selling the debt to a debt collection company

• failing to preserve data so the borrower cannot be given an up to date statement of account.

Struggling to repay your debts?

If you are struggling to repay your debts then think about getting some professional advice on how you can manage the payments. There is no guarantee you will be successful in getting the debts written off and there is also the moral issue of paying back the lender that advanced you the money in good faith.

SEEK ADVICE with a view to how to restructure your finances, this may include entering into a repayment programme that you can afford such as a debt management plan, Individual Voluntary Arrangement (IVA) or even bankruptcy.

We have some useful links for you below;

Debt comparison table

Six option guide to getting out of debt

DIY debt guide

Free Budget Wizard

Helpful organisations


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