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Alternative Dispute Resolution

The provision of Alternative Dispute Resolution for disputes arising under the Consumer Credit Act 1974

A response by the OFT to the DTI's consultation paper

17 March 2004

1. This is the OFT's response to the DTI consultation paper on the provision of Alternative Dispute Resolution (ADR) for disputes arising under the Consumer Credit Act 1974. A copy of this response will be placed on the OFT website.
2. Below we make general observations then answer the DTI's questions in the order in which they appear in the consultation paper.

GENERAL PRINCIPLES

3. The OFT welcomes the proposal to introduce an ADR scheme for all consumer credit. This will provide an effective redress mechanism for consumers, assist in raising standards of behaviour in the consumer credit market and thereby benefit business by encouraging best practice.
4. An ADR for credit will be of great value and benefit to consumers and the industry, increasing confidence and improving the reputation of the credit sector. Furthermore, it will help encourage best practice. Those who seek to exploit consumers through unfair practices will be faced with the prospect of effective challenge and redress. Others will have a cost-effective and efficient mechanism to resolve disputes.
5. It should be a feature of the ADR that the consumer must first complain to the firm with which it has a grievance. The ADR should not be the first port of call. Firms will need effective in-house complaints procedures in place that deal promptly and efficiently with complaints.
6. For the ADR to be fully effective, consumers will of course need to know about it and what it can do for them. The DTI will need to think about the right levels of publicity for the ADR and establishing a mechanism for disseminating information to consumers. Other ADRs, for example, require members to have the scheme's details and contact numbers printed on correspondence.
7. The OFT supports the general principles for the ADR set out in the consultation paper. An ADR should be an alternative to using the courts not just an additional and simultaneous method of seeking redress. In particular our view is that any ADR for credit should be:
• Comprehensive: all holders of standard licences should be required to join. The ADR should be able to look at all elements of a credit dispute.
• Independent: determinations should be impartial and the ADR clearly independent of the industry regulators, government and the industry. Its operation and rules should be transparent.
• Free to consumers: consumers should not have to pay to access the scheme. Costs should be recovered from firms, the bulk of which should be through case fees.
• Prompt: consumers should be entitled to have cases heard promptly and efficiently. The most serious cases should be fast tracked.
• Not binding on consumers: the ADR should be a genuine alternative to the court system. Consumers however should not be required to use the ADR before taking a dispute to court if they so choose.
• Firms should be encouraged to resolve disputes in-house: the ADR should not be asked to look at disputes that the firm has not been given the opportunity to resolve with a consumer.
• Fair and reasonable: determinations should be based on what is fair and reasonable in the circumstances.

Q1 Should the coverage of the ADR extend to all holders of consumer credit licences or should it be limited to lenders?

8. For the ADR to provide comprehensive coverage it will need to extend to all those who are licensed under the Consumer Credit Act. This should include those who carry out ancillary activities including providing advice, counselling, brokerage and debt collecting. Such activities can lead to claims for redress by consumers and should be covered. Coverage should not be limited to just lending.
9. If the ADR does not extend to all licensed businesses it will leave significant gaps in coverage. Consumers who had complaints about the way an introducer or broker had sold them credit would not be covered by the ADR and would therefore be reliant on the courts. Further, piecemeal or less than comprehensive coverage will be confusing for consumers and certain areas may fall through the gaps leaving no realistic form of redress for some.
10. Where the complaint is about the actions of an intermediary, that intermediary should be the party against whom a case is heard. There may be circumstances where ADR could decide that a credit agreement should be re-opened. In those circumstances, and where the intermediary is unable to do that, the ADR should have discretion to compel the lender to re-open an agreement. Similarly where an intermediary fails to provide redress, for example, because it has gone out of business, the ADR should have discretion to compel the lender to provide redress or re-open an agreement.
11. There may be situations where a consumer is awarded redress but the trader it has been awarded against ceases to be in business, for example through bankruptcy, or cannot be traced. The DTI will wish to consider what safety nets should be made available for those circumstances.
12. Many licensed businesses will already be members of trade associations which have dispute resolution procedures. It is possible that some will achieve approval under the OFT's Codes Approval Scheme. One criterion for approval is that adequate procedures are in place for complaints, including the availability of conciliation services and an independent redress scheme.
13. However, we see advantages in requiring all firms, including those with access to independent redress schemes, to be required to sign up to an ADR scheme for credit. Firstly, any existing schemes will have knowledge of their own industries but will not have expertise in consumer credit matters. Secondly, a single ADR for credit will help ensure consistency across the board.
14. Where trade schemes exist, firms should be able to make use of them as part of resolving a complaint early on and before it goes to the ADR. Where a scheme offers redress but the consumer declines it, the ADR should not be compelled to consider the case afresh if it considers a reasonable offer has already been made. Consumers should however have the right to decline arbitration through an industry scheme if a fee is payable.
15. Many firms are already covered by group licences, as distinct from individual standard licences. Many of them will already be members of an arbitration scheme. It cannot automatically be assumed however that an ADR scheme for holders of standard licences will be appropriate for those covered by group licences.

Q2 Should the scope of ADR be limited to issues relating to unfair credit or should it embrace all the issues in paragraph 52 above?

16. The ADR should not be limited just to unfair credit but should extend to all elements of a dispute. We agree that there are advantages to enabling the ADR to look at any and all aspects of a credit dispute, including those listed at paragraph 51 and discussed at 52. The ADR would be in a difficult position, if its role was a narrow one, in deciding whether a matter fell within its remit. Furthermore, if the scope of the ADR was limited the coverage of the regime would be limited and consumers suffering detriment would be left out of the scheme.

Q3 Do you think consumers should be charged a fee for bringing a case to ADR? If consumers were charged a fee for the use of ADR at what level should it be set?

17. It is an important principle of ADR that it should be easily accessible to consumers, subject to the firm being given an opportunity to deal with any dispute in the first instance. A fee to consumers would hinder that access and deter people from using it, especially where people may already be in debt. No fee should be charged to consumers.
18. Representations may be made that a fee to firms but no fee to consumers creates an imbalance. We would point out that complaining is not without cost to consumers. They must feel sufficiently aggrieved before complaining. Making a complaint or seeking redress involves valuable time and effort. Some consumers may be pursuing frivolous or vexatious complaints. However, these should be screened out at an early stage. The ADR should have discretion not to charge firms a fee in those cases. However, on balance, our view is that a fee to consumers could deter a significant number of consumers with legitimate concerns from seeking redress. It could also undermine consumer faith and confidence in the regime.
19. If no fee is charged to consumers, firms will have to meet the costs. A fair system would be for the bulk of costs to be recoverable through fees charged for each case brought to the ADR. This meets the principle that the polluter pays. There could also be a periodic contribution; for example, a levy based on size of their credit business. It would encourage firms to resolve complaints in- house rather than automatically leave matters to the ADR. Any fees should be reasonable and there is a strong argument that fees and levies made on small businesses particularly should be affordable, proportionate and reasonable. This is particularly relevant in the consumer credit market as very many licensed businesses are sole traders. There may be a case for a cap or ceiling for small firms, especially where the value of transactions is small. Fees would need to be subject to review on a regular basis.

Q4 Would a requirement that consumers continue to make payments while the case is being resolved present a barrier to significant numbers of consumers obtaining redress through ADR?

20. As noted in the consultation paper there are arguments on both sides. Asking consumers to continue to make payments in a case that may ultimately be determined in their favour could seem harsh. On the other hand allowing them automatic grace could potentially encourage unmerited complaints by those in hardship, could be unfair to lenders and may be distressing to consumers whose arrears build up as repayments are not being met. We therefore suggest that the ADR is set up to deal with complaints promptly and efficiently. Lenders should not be able to prolong procedures unnecessarily. Where the consumer is in obvious distress the ADR should be able to fast track a sufficiently serious complaint.

Q5 Should the fact that a case is being handled by the ADR body preclude either party from bringing court action?

21. No. It should always be open for a consumer or business to take legal action in the courts. It should however be at the court's discretion on a case by case basis whether the proceedings are stayed until the matter has been resolved through the ADR.

Q6 If a case is already before a court, should either party be able to ask the ADR body to consider the case or any aspect of it?

22. It would be sensible for the ADR to suspend consideration where there is a parallel court case. The issues, however, may not fully overlap and the ADR may consider it appropriate to deal with a dispute, especially given that the ADR will consider fairness whereas the court's decision would be based on matters of law. In deciding whether to proceed the ADR will, of course, need to have regard to the view of the court.
23. Where a case is already before a court the parties should be obliged to tell the ADR at an early stage, and before it is accepted as a case by the ADR.

Q7 Are there any circumstances where it would not be appropriate for the court to stay an action and to ask the ADR body to consider the issues, or some of the issues, in the case?

24. The court should be permitted to refer any aspects of the case to the ADR at any time, at its discretion. Both parties can of course suggest to the court that the ADR might be a more appropriate way of proceeding. However the court should also have the discretion to inform consumers that the ADR route is available to them. For this to be effective, courts will need to be made aware of the ADR and its role.

Q8 If there is a separate ADR, should there be a right of appeal and to whom? For example, to the courts or a regulatory body. If the latter, which regulatory body?

25. Determinations by the ADR should be binding on the licensed business concerned. (Any business will have access to judicial review, where appropriate.) This would increase confidence in the system. However, it would be difficult to impose similar conditions on consumers. As with other schemes, for example the Financial Ombudsman Service, consumers should not be constrained from pursuing legal action through the courts.
26. There should be no right of appeal, particularly not to the OFT. The role of the ADR is to determine, on the facts of a particular case, whether a business has behaved fairly and reasonably in respect of a consumer. This is an objective judgement based only on the information relevant to the case under consideration. Regulatory bodies, on the other hand, are making wider judgements - in the case of OFT this means determining the fitness of traders to hold consumer credit licences taking account of all available and relevant information. Thus the purpose and focus of both bodies - although both deal with fairness - is very different. Mixing them would threaten confidence in the ADR system by making it appear to be an arm of the regulator.
27. That is not to say that the OFT will not have an interest in decisions of the ADR. Clearly all information which may be relevant to the fitness of a trader to hold a licence is valuable to OFT. Thus, OFT will be looking for the more serious evidence - in the form of a concerted practice or action causing serious detriment - which emerges from ADR cases. It will not, however, for the reasons indicated above, be the case that simply because the ADR finds that a business has behaved unfairly OFT will seek to take any regulatory action.

Q9 If there were a right of appeal, who should meet the costs of representation for the consumer, and should the appeal body be able to make a costs order against an unsuccessful party?

28. As noted above the ADR should be self-contained. If the consumer went on to pursue their own court action this would be separate to the ADR regime. The liabilities for costs should be borne in the normal way as with other court cases. Furthermore where a firm seeks judicial review, costs should not be treated any differently to other judicial review cases.

Q10 Does the proposal in paragraph 67 represent a reasonable balance between the needs of individual consumers for redress and the need to establish a system which does not unreasonably impose new standards on the existing framework?

29. The ADR will bring significant benefits to consumers and industry. It will provide consumers with a new way of getting redress, it will increase confidence in the industry and encourage best practice. The proposals are reasonable and reflect good practice.
30. Transitional arrangements will need to put in place. With respect to existing agreements, ADR should also be available where both parties consent to its use, where it might not otherwise have been available.

Q11 What should the timescale be for the inception of the ADR?

31. As soon as all the necessary arrangements are put in place.

Q12 Do respondents have views on what should be the appropriate relationship between the ADR provider and the OFT?

32. The ADR should be separate from and clearly distinct from the OFT. It should be for the ADR to determine how it pursues and conducts its cases. The OFT does and will publish guidance for licensees and applicants on behaviour relevant to fitness and other matters.

Q13 Should the ADR share information about cases it deals with, which relates to the fitness of a particular trader to continue to hold a licence, with the OFT?

33. There should be information gateways between the ADR and OFT. Many matters heard by the ADR will be relevant to a licensee's fitness which the OFT might not otherwise receive information about. The OFT should therefore be told about adverse decisions. OFT should also be told about any indications of unwillingness to cooperate with the ADR.

Q14 Should a trader's failure to implement a decision of an ADR provider lead to the automatic loss of their consumer credit licence?

34. No. It is a feature of the licensing regime that revocations of licences are not automatic. It is for OFT to investigate concerns about fitness but with adjudicating officers making decisions after hearing representations from the licensees. OFT action should be proportionate. It certainly should, however, be a factor that the OFT should be able to take into account.
35. Efficient mechanisms should be put in place to ensure that determinations are complied with.

Q15 What merits and drawbacks do you see with the options set out above?

36. The need is for an ADR body which has the capacity and status to deal with complaints in a knowledgeable, informed and competent manner. In a complex market which is characterised by an imbalance of power and information between consumers and businesses it is imperative that the ADR has sufficient expertise in credit matters.