The Office of Fair Trading (OFT) said on Wednesday lenders and collectors must not threaten legal action if they have failed to fulfill debtor requests for information.

The OFT took the controversial step of disagreeing with the courts on the issue in its draft guidance for the industry on sections 77-79 of the Consumer Credit Act 1974 (CCA). They also said creditors and debt buyers must notify debtors that they are not allowed to enforce.

Sections 77-79, which allow consumers to request information about their credit agreements, have been reviewed by the OFT because of concerns that some debtors are being misled into thinking that these sections can be used as a loophole to get their debts written off and some creditors do not seem to understand their obligations.

A debt may be unenforceable but not written off

The OFT said the sections do allow a consumer to request a 'true copy' of their agreement but it agrees with the High Court that this does not have to be a photocopy or an exact copy of the original.

A copy of the debtor’s signature is also not required to fulfill the obligation. If the creditor fails to provide the information the debt is unenforceable, but the OFT emphasised that this does not mean it is written off. As such, lenders can pass the account to third parties to collect and can notify credit reference agencies of the arrears.

However, the OFT disagreed with elements of the Royal Bank of Scotland versus McGuffick court case, which said threatening legal action does not constitute enforcement.

While acknowledging the case, it said: "A creditor should in no way mislead a debtor as to the enforceability of the agreement. To do so would be an unfair of improper business practice and would be highly relevant to the creditor’s or owner’s fitness to hold a licence."

It added: "No communications or requests for payment should in any way threaten court action or other enforcement of the debt where the creditor or owner is aware that it cannot or will not be entitled to enforce."

Unenforcability should be made clear

The OFT then went further, insisting that communications with the debtor should in fact make it clear that the debt is unenforceable.

The regulator also said creditors should supply information to third parties who are authorised to seek the details by the debtor. In response to revelations that some creditors have refused to deal with claims management companies which do not hold a licence under the Act – the OFT has said that where a request is received from a debtor or hirer through such an unlicensed business it should still be responded to.

It suggested the owner of the debt writes to the debtor directly and informs them why the information is being sent to them instead of the unlicensed business. The creditor is then expected to notify the OFT and Ministry of Justice about the business.

Ray Watson, OFT director of consumer credit, said: "There has been a great deal of confusion over the meaning of these sections with many borrowers being misled into thinking that they can get their debt written off. This guidance is to clarify the legal position and the OFT view on standards expected of the industry, and to make consumers aware that they may be at risk if they seek to use these sections to avoid paying legitimately owed debts."

The deadline for responses to the consultation is 21 April 2010