6
Redressing the Imbalance
consumer protection measures as they saw fit. When the Consumer Credit Act came into operation in May 1996, the amounts of non-mortgage consumer credit being offered in Ireland were comparatively small. Nonetheless, there was clear recognition in the draft bill that consumers might be exploited at the point of accessing credit in terms of excessive charges for credit. This was manifested in two ways. Firstly, the Act introduced an updated system for licensing moneylenders, whereby the Office of Consumer Affairs14 took over responsibility for issuing such licences. It had the power to scrutinise rates of interest and charges in applications and grant (or refuse) a license on that basis. Secondly, the Act provided in Section 47 for a method whereby the Circuit Court could assess whether the cost of credit in a credit agreement was excessive.
14. This power is now exercised by the Central Bank. 15. This includes, according to section 2 of the Act, the associated banks, building societies and a defined list of finance houses.
However, the combination of these two provisions has failed to curb the potential for excessive interest rate charges in credit agreements for a number of reasons. Section 2 of the Consumer Credit Act 1995 defines a moneylender as a person who carries on the business of moneylending, but specifically excludes a number of entities, including – most significantly – a credit institution. A ‘credit institution’ under the legislation includes a body licensed under the Central Bank Acts – for example domestic banks, foreign banks operating in Ireland and mortgage lenders. The definition of a ‘moneylending agreement’ includes a credit agreement entered into by a moneylender where the total cost of credit to the consumer under the agreement is in excess of 23% APR (Annual Percentage Rate of Charge) and all moneylenders must first seek and obtain a licence from the Central Bank to be authorised to charge these rates of interest. However, because only a moneylender can enter into a moneylending agreement and a credit institution is not included in the definition of moneylender, banks do not need a license to charge moneylending
rates of interest. This gap (or lacuna) in the law has effectively allowed banks to charge moneylending rates without having to obtain consent from the Central Bank which regulates them. In turn, as outlined above, section 47 of the Consumer Credit Act 1995 provides that a consumer or a person acting on the consumer’s behalf may apply to the Circuit Court for a declaration that the total cost of credit in any agreement is excessive. The Circuit Court must take into account a defined list of factors in such an assessment and has a variety of powers to set aside the agreement or revise it, or even to relieve the consumer from payment. The Central Bank must be given an opportunity to be heard at any such application. Critically, however, this section does not apply to credit agreements advanced by a credit institution or a mortgage lender.15 This was a change from the original Bill which did not exempt any provider of credit from its terms and FLAC’s understanding is that this exemption resulted from a lobbying exercise by credit institutions. As a consequence of this exclusion of credit institutions and mortgage lenders, FLAC has come across numerous examples of what we consider to be excessive charging practices during the boom period; practices which were permitted by the soft-touch approach to regulation, an approach that persists to this day. The first entity to do so in our experience was called POS Finance. This company specialised in credit sale loans associated with the purchase of computer and other equipment through large retail stores in the 1990s at APRs of between 25% and 30%. These are moneylending rates and extremely high in comparative terms because of the length of the agreements, which were typically of three years duration. On closer examination, POS Finance turned out not to be a separate company at all, but a business name of Bank of Ireland. Being therefore a credit institution licensed under the Central Bank Acts, there was no requirement for it to obtain a moneylender’s licence for the reasons explained above.