The importance of consumer protection in insolvency: Understanding Section 75 of the Consumer Credit Act

IPA Insolvency Practitioner newsletter, August 2023

Contents

• Paul Smith, CEO
• Paul Davis, President
• Director Loan Accounts written-off as part of corporate insolvencies
• Financial sanctions guidance
• Supreme Court ruling means many Litigation Funding Agreements are unenforceable
• Safeguarding your insolvency practice against cyberattack and ransomware threats: Lessons from the Wannacry attack
• HMRC updates
• Just a week to go to the Scotland Roadshow! (CPD: 4h)
• Spotlight on Anti-Money Laundering and Fraud (CPD: 5h)
• IPA Learning | Pension Claims in Insolvency – Are You Getting it Right? (CPD: 2h)
• New speakers announced for the 15th Personal Insolvency Conference (CPD: 6h)
• Do you know someone in the profession who deserves recognition this year?
• Discounted meeting facilities from Office Space in Town (member login required to view)
• Save money on your airport parking with APH! (Member login required to view)
• Need new IT products? Claim exclusive IPA membership offers from Dell
• CPI training with BPP – special offer for IPA members (member login required to view)
• Make savings on essential CPD with exclusive discounts on training from the IPA and our partners
• An opportunity for Registered Property Receivers!
• Committee Chair vacancy
• Case law update
• Clearway: Protecting people, property and assets
• IPA exclusive industry update from Insolvency Insider

Introduction

On 11 July 2023, HM Treasury published a response to its consultation on reforming the Consumer Credit Act 1974. Whilst the reforms have some wider benefits, this article concentrates on the specific impact of protection for consumers from corporate insolvencies. Consumer protection plays a vital role in maintaining a fair and thriving marketplace. In the United Kingdom, Section 75 of the Consumer Credit Act has been a cornerstone of consumer rights, offering valuable protection for credit card users when making purchases between £100 and £30,000. This provision has significant benefits for individuals and the economy, instilling confidence in consumers and businesses alike. However, any potential loss of Section 75 and its replacement with Financial Conduct Authority (FCA) rules could lead to a range of challenges for consumers when claiming in an insolvency.

The benefits of Section 75 for individuals:

1. Enhanced consumer rights: Section 75 ensures consumers enjoy robust protection when making credit card purchases. It holds credit card providers jointly liable with merchants for any breach of contract or misrepresentation. This empowers consumers to claim refunds or replacements directly from their credit card issuers in case of faulty products or undelivered services.
2. Increased confidence: With the safety net of Section 75, individuals feel more confident making high-value purchases using their credit cards. This bolsters consumer spending, driving economic growth as consumers become less hesitant about significant investments.
3. Simplified dispute resolution: The provision simplifies the dispute resolution process for consumers. Instead of having to deal with the merchant directly, they can contact their credit card company to initiate the refund or compensation process, making it more efficient and convenient.

The impact on the economy:

1. Stimulated consumer spending: Section 75 encourages consumer spending by reducing perceived risks associated with significant purchases. This increased spending, in turn, boosts sales for businesses and contributes to overall economic growth.
2. Enhanced trust in financial institutions: By offering robust consumer protection, Section 75 enhances the credibility of credit card companies and financial institutions. Consumers are more likely to trust these entities, leading to increased credit card usage and promoting economic activities.
3. Reduced legal disputes: With clear guidelines and judgements on liability, Section 75 helps reduce the number of legal disputes between consumers, merchants and credit card providers. This contributes to cost savings for all parties involved, ensuring smoother business operations.

Potential Problems of Losing Section 75:

1. Reduced consumer protection: The loss of Section 75 might diminish consumer protection, exposing consumers to increased risks during credit card purchases. Obtaining refunds or compensation for faulty products or undelivered services could become more challenging.
2. Complex regulations: FCA rules might lack the clarity and simplicity of Section 75, leading to confusion among consumers. Complex regulations could result in more disputes and legal conflicts between consumers and credit card providers.
3. Decreased consumer spending: Without the assurance of Section 75, consumers might become more cautious about using credit cards for significant purchases, leading to decreased consumer spending and impacting economic growth.
4. Impact on financial institutions: Credit card companies could face increased risk without the joint liability protection of Section 75. A rise in disputes and claims might lead to higher costs for consumers.
5. Weakened consumer trust: Losing the strong protection offered by Section 75 could erode consumer trust in financial institutions and credit card providers, leading to reduced credit card usage. More individuals claiming in insolvencies could have a significant impact on the administration of insolvencies. 

Conclusion

Section 75 of the Consumer Credit Act has been instrumental in providing essential consumer protection, fostering trust and stimulating economic activity. It ensures individuals can make credit card purchases with confidence and resolve disputes effectively. However, the potential loss of Section 75 and the replacement with FCA rules could pose challenges for consumers claiming in an insolvency. Striking a balance between consumer rights and the interests of businesses and financial institutions is crucial to maintain a fair and prosperous marketplace. Policymakers must carefully consider the implications of any changes to ensure consumers’ interests are protected while promoting economic growth. The next steps of the consultation is a second consultation in 2024 to seek comment on the detailed proposals. The insolvency profession will need to pay close attention to the detail and assess any potential impact.