Taking the credit

There remains uncertainty within schools about consumer credit and how they are to comply with the requirements of the Consumer Credit Act 1974 (as amended). John Deakin sheds light on the implications for fees collection

To understand the consequences of the Consumer Credit Act (CCA), it would be helpful to consider a typical case study, encountered by many independent schools, and to examine the numerous options available.

Mr and Mrs X own and operate a small business. They have two children at your school, one in Year 11 and the other in Year 13. They visit the bursar during the autumn term and explain the following:

Their business has seen a significant downturn in recent months, so they are unable to meet many of their financial commitments. They own a house valued at £500,000 which is not subject to any charge or mortgage. They have little by way of savings or other assets of any value. Documentary evidence brought to the meeting supports their position.

Mr and Mrs X have not paid the autumn term’s fees of £5,000 per child and are unlikely to be able to pay the fees for the spring and summer terms as they fall due. The school has distributed all of the funds set aside for bursaries and has few funds remaining to support those in hardship. The school does not hold a valid consumer credit licence.

The family has a long association with the school and both parties would like to see the children through their public examinations at the end of the academic year.

Possible solutions:
The house
It would appear that the house is Mr and Mrs X’s only significant asset. Therefore, it may be possible for the school to agree to the terms and registration of a legal charge as security for both the outstanding fess for the autumn term, and fees for the spring and summer terms. While this may appear to be the “golden ticket”, all may not be as it seems.

The legal charge, while serving as security for the fees will not, of itself, necessarily bring the money to the school. Agreement for the repayment of fees would still need to be made with Mr and Mrs X. In addition, and more importantly, to register a first legal charge, the school will require a valid consumer credit licence to comply with all the complex pre- and post-contract requirements of the CCA, some of which are highlighted further below.

In view of the possible pitfalls set out above, the answer for Mr and Mrs X might be to contact the bank or other mortgage lender to arrange a loan to meet all of the fees required until the end of the academic year. However, given the current economic conditions, most reputable lenders may be reluctant to lend to Mr and Mrs X for fear of default on repayments, resulting in an additional property in its land bank during a stagnant property market.

Single repayment agreement
If the school were to agree with Mr and Mrs X a repayment plan for the deferment of the autumn term’s fees combined with spring and summer terms’ fees, such an agreement will be regulated as consumer credit under the CCA. Not only would the school require a valid consumer credit licence, it would also need to meet in full the requirements of onerous regulations and orders made under the CCA governing:
• the provision of pre-contract information and the imposition, or otherwise, of a cooling off period which is dependent on whether the agreement is conducted face to face or at distance;
• the format and content of the agreement itself; and
• post-contractual matters such as the provision of annual statements and procedures for default or arrears.

Since 1 February 2011, these requirements have increased following the introduction into the UK of a new EU directive on consumer credit, which now imposes:
• a duty for schools to provide explanations of the credit on offer, which will allow the consumer (the parents) to decide whether it is suitable to their needs and circumstances;
• an obligation on the school to assess the creditworthiness of the parents before concluding the agreement. If the assessment is based on information from a credit reference agency and credit has been declined, the parent must be informed of this;
• a right to the parents to repay an agreement early in part and to receive a consequential reduction in the total costs of the credit. This new right is an addition to the current right for parents to make early payment of the full amount; and
• in agreements that provide for a variation in the rate of interest charged, an obligation is on the school to provide the parents with notice of the variation before it takes effect. This extends existing requirements to provide advance notice of changes to a credit agreement.

Operating regulated consumer credit agreements without a consumer credit licence is not only an offence under the CCA, which can be penalised by imprisonment or a fine, but it will also render the agreement unenforceable against the parents. Merely having a valid licence without then complying with the requirements of the CCA may have the same consequences for the school and the individuals making such agreements.

Outsource to a third-party credit provider
To avoid offering credit itself, the school should suggest to Mr and Mrs X that a third-party credit provider may be able to help by entering into instalment agreements with them for the payment of future fees. However, many providers do not offer regulated agreements, and if the school is to recommend or introduce the parents to the provider or to assist in the completion or delivery of application forms, such activity may also be regulated under the CCA for which the school would require a consumer credit licence, including Category C credit broker status. Strict compliance with the relevant parts of the CCA would be required of the school if the third-party credit provider is to be able to enforce its agreements against the parents.

Make use of exemptions available
The CCA contains a number of exemptions which allow certain arrangements to fall outside regulation. The two exemptions most commonly available to schools are described below. It is important to note that they are mutually exclusive and to combine the two into a single agreement with parents will bring that agreement within regulation by the CCA.

The first of the exemptions, referred to as the “low cost” exemption, is available only for fees that have already fallen overdue. For Mr and Mrs X, the school would be able to agree a plan for the repayment of the autumn term’s fees over any agreed period of time provided that interest charged on the sum to be repaid does not exceed a rate set out in regulations made under the CCA.

The other available exemption applies only to fees that have yet to fall due for payment. Using this exemption, the school would be able to agree separately with Mr and Mrs X the deferment of fees for the spring term and for the summer term. Under each of these separate agreements, fees must be repaid by no more than four instalments within a twelve-month period. Since 1 February 2011, the school is not permitted to charge interest nor any admin or arrangement fee if this exemption is to apply. In addition, great care or competent legal advice needs to be taken by the school to avoid unwittingly saying or documenting anything that may combine the two separate agreements into one regulated agreement.

In summary, a school has a range of flexible options to offer to parents for the relationship to continue. However, a good deal of thought needs to be applied before the school commits to any agreement to ensure that it is compliant with the CCA and is able to enforce the terms of any arrangements.

John Deakin is an associate at Veale Wasbrough Vizards. John can be contacted at jdeakin@vwv.co.uk or on 0117 314 5335. 

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