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1. INTRODUCTION

1.1We have been instructed by Nesta to provide commentary on the potential for funders of heat pump systems to utilise finance arrangements that involve taking third party ownership of the relevant assets (TPO).

1.2The contents of this report are intended only to represent our own personal views based on long standing experience of acting for asset finance funders (including companies funding or considering the funding of heating systems).

1.3Accordingly:

1.3.1This report sets out our understanding of the relevant legal issues, but does not constitute legal advice and may not be relied on as such; and

1.3.2Comments about the practical workings of the asset finance industry and our suggestions regarding the implementation of a TPO based scheme are not intended to be statements of fact or opinion made on behalf of asset finance funders.

1.4The first section of the report highlights key points made, which are then explored in greater detail in subsequent sections by reference to a number of questions posed by Nesta

2. SUMMARY OF KEY POINTS

2.1The installation and use of a financed heat pump system involves three distinct suppliers:

1. 2.1.1installers, who promote, design and install the system;
2. 2.1.2funders, who provide finance to support the cost of installation; and
3. 2.1.3maintainers, who maintain the system post installation.

2.2A given commercial entity may in practice supply more than one of these services. Nevertheless, in order to maximise consumer protection it is necessary to consider each service as a distinct activity and allocate responsibility/oversight accordingly.

2.3The FCA is primarily responsible for the oversight of funders providing regulated credit (whether loans or TPO). Ofgem is primarily responsible for the oversight of installers and maintainers. Each regulator has the specialist knowledge required to perform their own function, but neither would be able to perform both functions.

2.4Currently, BUS subsidy is conditional on householder ownership of the core heat pump asset. This restricts a consumer's options for funding the installation of heat pump systems to loans, by preventing access to forms of third-party ownership finance such as HP, conditional sale and hire.

2.5TPO asset finance is in many ways no different to loan finance. In both cases:

1. 2.5.1the consumer assumes liability to repay the finance and may be subject to debt collection activity if they fail to do so;
2. 2.5.2the funder is responsible for assessing the affordability of the proposed finance, and for compliance with a range of requirements for the provision of information enabling a consumer to make an informed decision about the suitability of the finance;
3. 2.5.3the installer is in practice responsible for ensuring the initial suitability and fitness of the heat pump system and its performance in accordance with a consumer's expectations; and
4. 2.5.4the maintainer is responsible for keeping the system fully operational during its anticipated working life.

2.6Third party ownership of the heat pump system does create some additional consumer concerns; in particular, as to the potential for it to be subject to repossession.

2.7There are, however, strong protections already in place to oversee TPO funder activity and ensure good consumer outcomes are achieved. These protections are:

1. 2.7.1partly legal - for example the application of unfair terms legislation, and the restrictions on repossession contained in the Consumer Credit Act 1974 (CCA); and
2. 2.7.2partly regulatory – for example the FCA requirements in CONC and the Consumer Duty.

2.8These protections are subject to a mix of court and FCA oversight.

2.9Furthermore, to the extent that concerns remain, those protections can be enhanced by requiring approved TPO funders to adopt a code of conduct that would be enforceable by the FCA in accordance with its Consumer Duty.

2.10Lastly, we note that many of the concerns raised by consumer organisations in connection with TPO finance (such as product suitability and performance, maintenance issues and price rises, and obsolescence due to developments in technology) are equally applicable to the non-financed installation of any heating system.

3. BACKGROUND

3.1As currently constituted, the UK Government Boiler Upgrade Scheme eligibility criteria include a requirement that the ownership of the Heat Pump must vest in the householder at the time at which the relevant grant (currently £7500) is payable. In practice, this means that householders wishing to obtain financial support from retail funders for the purchase and installation of heat pump systems are only able to do so by way of unsecured lending.

3.2In this context, the use of the word 'unsecured' does not imply that the alternative would be a form of lending secured over real property by some form of charge. Rather, the word is used by asset finance companies to differentiate funding that is not supported by their retention of the ownership of the asset in question pending repayment by the customer.

3.3Standard forms of unsecured asset finance include personal loans and credit sale agreements under which ownership of the asset vests in the customer at the time the finance agreement is entered into. Standard forms of secured asset finance include:

1. 3.3.1Hire purchase (HP), under which the asset is hired to the customer over a fixed period, with an option to purchase as/when the repayments have been completed;
2. 3.3.2Conditional sale (CS), under which the asset is sold to the customer, but ownership retained by the funder until all repayments have been completed; and
3. 3.3.3Hire, under which the customer pays rentals for the use of the asset during an agreed period, but will not become the owner at any time.

3.4It should be noted that:

1. 3.4.1For CCA purposes, HP is treated as being a credit agreement analogous to CS, notwithstanding that the asset is in legal terms hired unless/until the option to purchase is exercised;
2. 3.4.2Legally, Personal Contract Purchase (PCP) is a variant of HP, rather than a distinct form of financial agreement, and refences in this note to HP should be read as encompassing PCP;
3. 3.4.3Hire agreements can take a number of forms, but a key distinction for present purposes needs to be drawn between 'finance leasing' (under which the rentals are calculated so as to repay to the funder the full original cost of the asset over the length of the fixed hire period) and other forms of hire (including both short term and various types of 'operating lease' or open ended rental); and
4. 3.4.4For historic reasons, some consumer protections applicable to HP and CS do not apply to hire agreements.

3.5The funding of asset finance is complex. However, many funders believe that:

1. 3.5.1The retention of ownership by asset finance companies provides a greater level of confidence for the recovery of their original outlay and finance charges;
2. 3.5.2This increased confidence extends to the wholesale funders that provide such companies with finance, enabling them to fund their asset finance activities at interest rates that are lower than can apply to the funding of unsecured lending; and
3. 3.5.3This in turn means that (all other things being equal) the interest rates such companies are able to charge their end customers for asset finance can be lower than for the equivalent unsecured lending.

3.6The above summary is inevitably highly simplistic and is intended only to illustrate why forms of finance involving TPO are seen as presenting an opportunity for householders to obtain more affordable finance to support the installation of heat pump systems.

3.7That said, in addition to opportunities, all forms of finance present some elements of risk for both funders and customers, and in respect of retail consumer finance both Parliament and the relevant regulator (currently the FCA) have over many years been engaged in setting up key statutory and regulatory protections to ensure that a fair balance is struck between the reasonable interests of both funders and consumers.

3.8It is also worth noting at this stage that in our experience there are a number of common features of asset based finance that are not always well understood by those unfamiliar with the practical and legal aspects of the area.

3.9In particular, the extent of responsibility that TPO's have for the ongoing performance of the asset. As explained in more detail below, asset finance companies using TPO structures act as the 'supplier' of the relevant equipment for the purposes of consumer protection legislation. As such, they are contractually responsible for the initial quality and fitness for purpose of the financed goods.

3.10On the other hand, whilst TPOs have that responsibility, they are not necessarily liable for the ongoing maintenance and servicing of the asset that will be required in order to keep it working properly over the full anticipated lifetime of use. Some funders may choose to take on contractual responsibility for such matters; otherwise, it remains the responsibility of the customer in the same way as if they had purchased the asset directly.

3.11This being so, customers will always need to enter into a distinct set of arrangements in respect of maintenance and servicing. This may often be with an entirely separate service supplier. Alternatively, it may be that the TPO itself will agree to take responsibility for such arrangements, which will then be built into the contractual package agreed with the customer.

3.12In addition, when considering hire based finance structures, a practical distinction needs to be drawn between (a) rental companies and (b) asset finance companies.

3.13Rental companies tend to hire out assets from stock on a maintenance inclusive basis. Rental periods tend to be open ended, and the same asset may be rented by more than one customer. As such, the rentals payable are intended to cover the use, maintenance and servicing of the asset, rather than structured solely by direct reference to the initial cost. Examples would include TV and white goods rentals in the consumer sector, copier and yellow goods rentals in the business sector, and short term motor vehicle rentals in both sectors.

3.14Asset finance is structured differently. The funder only buys the asset for the purposes of a specific finance contract with a single customer and, if the asset is returnable at the end of the agreed term, will dispose of it rather than retain it for future use. Rental periods are fixed or minimum term, and the rentals payable over this term are intended to repay the initial cost of the asset, together with funding charges. Examples would include all forms of HP and CS, as well as the leasing of a range of consumer and business assets such as machinery and motor vehicles.

3.15The distinction is not hard and fast, but it is helpful to bear it in mind when looking at customer risk and consumer protection issues. Apart from anything else, the legislative framework for regulated hire agreements set out in the CCA is essentially built around the concept of asset rental, rather than asset finance. At the time, credit based consumer asset finance was commonplace, as was consumer asset rental, but hire based consumer asset finance only developed as a business activity subsequently.

3.16In addition, the broad comments we make are intended to describe the position in the asset finance industry within which we work and should be understood as such. It is our understanding that Nesta is interested in the potential for the asset finance industry to provide realistic funding alternatives to support the 'purchase' by consumers of heat pump systems.

3.17In the circumstances, we have been asked to provide commentary in respect of a number of agreed questions in order to assist Nesta's consideration of the risks to customers that might arise if DESNZ were to permit such TPO funding for heat pump systems, as against the existing risks that already apply in connection with 'unsecured' funding (in practice, loans)

4. AGREED QUESTIONS

4.1Question 1: For TPO models, how does relevant consumer credit legislation (e.g. CCA, The Consumer Duty) provide protection to consumers on the below matters and what commercial considerations does this create for TPO providers:

4.1.1Repossessing heat pumps?

Include an overview of a typical arrears and default process for a lender with a defaulting customer under the CCA, FSMA, Consumer Duty etc. Outline the legal and regulatory hurdles to (a) repossession and (b) a lender's alternative options for debt recovery.

4.1.2Doing adequate consumer credit and affordability checks?

4.1.3Providing clear and trustworthy information about the sale:

• What are the repercussions for providers for providing misleading information?
• How could this requirement create risk for providers due to conflicting/changing technical guidance e.g. MCS performance estimates?

4.1.4Avoiding unfair contractual clauses? For example:

• End of term (e.g. rolling to peppercorn rate, removal)
• 4.1.5Amending contracts after agreement?
• 4.1.6Enabling early termination / prepayment, moving house etc.?

4.2Question 2: We have been told that prohibiting repossession would mean a model may no longer be a consumer hire or hire purchase model. Is this true? How might each side be argued?

4.3Question 3: How might a customer's rights be affected by the insolvency of a TPO funder, and what would happen as regards ownership of the assets?

5. QUESTION 1A – REPOSSESSING HEAT PUMPS

5.1The repossession of assets by TPOs in the current context requires consideration of two key issues:

1. 5.1.1the existence of regulatory restrictions designed to protect consumers from unwarranted exercise of the right to repossess; and
2. 5.1.2the desire of the asset owner to effect repossession.

5.2Dealing firstly with the second point, the owner of an asset will only incur the cost of repossession if it has a commercial reason for doing so. In asset finance parlance, assets fall into two broad categories: 'hard' and 'soft'.

5.3Hard assets are those which are perceived to have a potential substantive net sale value if recovered from a customer, whether at the end of a finance term or on earlier termination. This value is often referred as the 'residual value' of the asset. Soft assets are those which are considered to have little or no resale value.

5.4The distinction is important, because a hard asset provides an element of security for the repayment of the debt to the finance company in the event of a default in payment by the customer. However, it is only the anticipated net sale value of an asset that is relevant for the purposes of repossession – ie the amount which the finance company believes it will recover on resale net of the costs that it will incur in the recovery, storage, insurance and sale of the asset.

5.5Motor vehicles and many types of industrial equipment are good examples of hard assets. There is a well established market place for the sale of such second hand assets, and in most cases the potential costs of recovery, storage and insurance are relatively low in comparison to the potential sale price.

5.6The position for soft assets is very different. Absent exceptional circumstances, there is nothing to be gained by repossession. Once the costs of the exercise are factored in, recovery would only increase the loss suffered by the finance company, rather than reduce it.

5.7In the current context, the assets contained within a household heat pump system (indeed any form of heating system) would in our view be regarded by finance companies as soft assets having no real residual value. That is not to say that they would have no value whatsoever. However, we believe that the resale value of such assets would most likely be small; potentially no more than scrap value.

5.8In this regard we understand that there is no established market for such second hand assets. In addition, Reg 9(1)(a) of the Boiler Upgrade Scheme (England and Wales) Regulations 2022 requires (with one minor exception) all parts of a heat pump to be new for it to be eligible for the scheme.

5.9By contrast, we believe that the cost of repossession would be relatively high. A heating system cannot simply be collected; it would need to be decommissioned and dismantled by experienced engineers.

5.10In the circumstances, we believe it is unlikely that TPOs would have any general commercial appetite for the repossession of heat pump systems (though see section 11 below regarding the need to retain the right in theory).

5.11In addition, as indicated, there are a number of important consumer protections in place, designed to prevent the inappropriate use of the power of repossession by finance companies. Some are statutory and contained in the CCA; others are regulatory and set out in the FCA Handbook.

5.12Firstly, in order to exercise a right of repossession, a funder would need to be able to terminate the customer's contractual right to possess and use the asset. In the B2C sector, contract terms permitting termination would be subject to the requirements of Unfair Contract Terms legislation (see section 7 below). The FCA is the appointed body tasked with ensuring that authorised firms comply with these requirements, both in letter and spirit.

5.13Furthermore, before any contractual power to terminate can be validly exercised, the CCA requires formal notice to be served on the consumer. In the vast majority of cases, this would be a Default Notice under s87.

5.14Service of such a notice is designed to give the consumer due warning of the intent to terminate and, if that is possible, an opportunity to remedy the position. Only once the prescribed period for the statutory notice has expired can the finance company proceed with termination and, in the meantime, the consumer is entitled to apply to court for a Time Order which may, among other things, place restrictions on the repossession of the asset.

5.15Secondly, even once terminated, finance companies are not entitled to (and it is a breach of statutory duty if they do) enter any premises in order to take possession of assets which are subject to regulated HP, CSA or hire agreements, unless either:

1. 5.15.1The consumer has given contemporaneous informed consent; or
2. 5.15.2A court order entitles them to do so.

5.16An additional protection applies in respect of HP and CS agreements (but not for hire). If the consumer has paid more than one third of the total payable under the agreement, the asset becomes 'protected' and may not be repossessed, unless one or other of the conditions set out in para 5.15 applies. If the finance company does repossess without a court order or customer consent, they become liable to repay all sums paid to date by the consumer, who is also released from any further liability under the finance agreement.

5.17Compliance with these requirements by consumer finance companies is overseen by the FCA, as the consumer credit regulator, and affected consumers would have the right to bring court action and/or complain to the Financial Ombudsman Service (FOS). The latter is free for consumers and has a broad remit to resolve disputes between firms and customers on the basis of what it considers to be fair and reasonable, rather than being restricted by legal technicality.

5.18Any finance company wishing to repossess would also need to comply with the FCA's Handbook Rules and Guidance regarding:

1. 5.18.1'forbearance'; and
2. 5.18.2the Consumer Duty.

5.19In brief, these provisions require authorised firms to fairly balance their own interests against the reasonable interests of a customer. This would include:

1. 5.19.1Forbearing to enforce contract rights unless it is strictly necessary and can be done without having an unfair impact on the consumer. In particular, the FCA requires that firms must:
   1. agree a repayment arrangement with the customer that allows the customer a reasonable period of time to repay the debt (CONC 7.3.5)
   2. take all reasonable steps to ensure that any repayment arrangements agreed with customers are sustainable (CONC 7.3.5B);
   3. reduce, waive or cancel any further interest or charges to the extent necessary to ensure that the level of debt under a payment arrangement does not rise; and
   4. not take steps to repossess goods other than as a last resort, having explored all other possible options (CONC 7.3.17).
2. 5.19.2Taking active measures to ensure, to the extent reasonably possible, that consumers achieve 'good outcomes' in accordance with FCA Principle 12 (the Consumer Duty). This extends to the application of forbearance under CONC 7.3, and all staff employed by an authorised firm who would be engaged in such activity are subject to Conduct Rule 6, which requires them to act to deliver good outcomes for consumers (COCON 2). Such outcomes are, to a great extent, shaped by the reasonable expectations of consumers at the time of entry into the finance agreement.

5.20The Consumer Duty was only introduced with effect from the end of July 2023. The FCA have, however, made it clear that they believe it has already had a considerable effect on standards of customer treatment in all financial services markets, by ensuring that firms comply with a 'best practice' approach based on consumer and regulatory expectations.

5.21In addition, HP and CS (though not hire) agreements are subject to the Unfair Relationship provisions of CCA ss140A and 140B, which encompass the way in which otherwise reasonable contract rights may be exercised in practice.

5.22In regard to paras 5.11 to 5.21 above, we believe that the FCA and courts (as appropriate) would, when considering the reasonableness of repossession, take into account the likelihood of potential benefit to the finance company (as per paras 5.2 to 5.10 above), as against the clear detriment to the consumer of permitting repossession of a household heating system.

5.23For all these reasons, we consider it unlikely that permitting TPO by finance companies would in practice lead to the repossession of the relevant assets, save in the most egregious cases, and then only with the specific consent of either the householder or a court.

5.24Instead, we would consider it more than likely that action by finance companies resulting from payment default would be focussed instead on the taking of steps to enforce payment by way of debt collection activity.

5.25Before providing an outline of the typical debt collection approach of an asset finance provider, it is worth stressing that (repossession aside) this approach is essentially no different to the approach taken by an unsecured lender to collect debts overdue under the terms of a regulated loan agreement. As such, permitting TPO finance agreements will not have any impact on the debt collection aspects of the consumer finance of heat pump systems. That being so, we will limit our commentary to a high-level overview.

5.26Debt collection by finance companies is, like repossession, a commercial activity conducted in order to reduce the loss suffered as a result of a customer's non-payment. Again, therefore, the cost of activity will only be undertaken if it is considered likely to produce a net financial benefit. To that extent, therefore, the ability of the debtor to pay is central to the approach taken. However, the unwillingness of some debtors to engage with the collection process and make affordable repayment may require an escalation via one or other of a number of standard formal court processes.

5.27If and when arrears start to occur, a finance company will attempt to engage with a customer with a view to understanding the reasons for non-payment and the prospects for getting the repayments 'back on track'. The FCA requires the application of 'forbearance' as part of this process.

5.28If the arrears continue to grow, the finance company will eventually default the agreement. In accordance with FCA guidance, this stage is generally reached when the arrears accrued are equivalent to 3 months repayments. Service of a CCA Default Notice is mandatory if the finance company wishes to use the arrears as a basis for accelerating the debtor's liability for repayment of the outstanding balance of finance. However, a Default Notice is not required if the anticipated collection activity relates only to ongoing arrears, as and when they fall due.

5.29As an aside, we would note that it is only at this stage that the potential (albeit unlikely) steps towards repossession of assets outlined above could commence.

5.30Once the full balance becomes due, finance companies are required by the FCA to address the question of repayment in accordance with both forbearance and the Consumer Duty. Action for recovery should only be undertaken if required, and then only to the extent (and in a manner) that is reasonable taking into account the assessed ability of the householder to make debt repayments without adverse impact on their ability to service 'priority expenditure' (necessary living expenses such as mortgage payments, utility bills, food, clothing and the like).

5.31Initial debt collection action may be undertaken by finance companies using internal resources or may be outsourced to external specialist debt collection firms (who are themselves directly authorised and overseen by the FCA). At this stage, the intent is to engage with the debtor, gather information regarding their finances and ability to pay, and seek to agree an arrangement for the regular payment of such sum as is reasonably affordable.

5.32With one standard exception, formal debt collection action would only normally be undertaken if the debtor is unwilling to either engage with the process or to agree reasonable repayments

5.33That exception, which might apply even in cases where it is clear that the debtor cannot currently afford to make more than a token repayment, is when the creditor wishes to obtain security for the debt over property owned by the debtor by way of a charging order. Such action is, however, only possible by way of court application after the entry of a judgment against the debtor.

5.34It is possible for a judgment creditor to apply to enforce a charging order by way of sale. However, this is unusual, and would only be granted at the discretion of a Judge, taking into account the interests of the debtor and any family resident in the property. In practice, charging orders are generally regarded as a long term security which will only be discharged as and when the property is sold for other reasons.

5.35Other potential forms of debt collection action include attachment of earnings, third party debt orders and the issue of bailiff's warrant to seize goods. However, all such steps are subject to court oversight. It is, perhaps, also worth stressing again that all these forms of action apply to the collection of debt, regardless of whether the underlying finance agreement is a TPO product or an unsecured loan.

5.36To sum up this section so far, we believe that if finance company TPO's are permitted for heat pump installations:

1. 5.36.1It is unlikely that repossession of the assets will occur in practice, save in unusual circumstances (similar to the position that exists for the supply of energy by utility companies);
2. 5.36.2Any debt collection action by a TPO would only be equivalent to the actions which may in any event currently be taken by an unsecured lender in respect of loan debt;
3. 5.36.3In both cases, there are statutory and regulatory provisions in place to safeguard the interests of householders; and
4. 5.36.4The combined oversight of the courts and the FCA would ensure that finance companies operate in accordance with those safeguards.

5.37Finally in this section, we consider the linked issue of 'decommissioning', by which we mean the potential ability of a funder to remotely disable a heat pump system without access to the relevant property. We are not conversant with the practical issues, but assume that such decommissioning will be possible in at least some cases, given that it is commonplace for heating systems to be remotely controllable via internet access.

5.38Certainly, the ability to decommission motor vehicles exists, if the finance contract provides for it and appropriate software has been installed. In our experience this is not a facility that is commonly adopted within the motor finance industry. Nevertheless, we recognise that the potential for remote decommissioning of a household heating system is an issue that must raise consumer concern.

5.39The issue is, we suggest, similar to that applying to the supply of basic utility services such as electricity and water, where decommissioning is strictly controlled in the former case, and not permitted at all in the latter.

5.40In our view, whilst the issues of repossession and decommissioning are linked in practice, they each have a distinct meaning. That being so, we do not believe that the specific CCA protections against 'repossession' outlined in paragraphs 5.15 and 5.16 would apply to 'decommissioning'.

5.41On the other hand, we do believe that the other consumer protections we refer to in respect of repossession would apply also to decommissioning, as follows:

1. 5.41.1A funder would only be able to decommission a heat pump system where the finance contract contained a clause which allowed the funder to do so such a clause would be subject to the Unfair Terms requirements referred to in section 7;
2. 5.41.2Service of formal advance notice under CCA s87 is also required where a funder wishes to 'enforce a term of a regulated agreement by... treating any right conferred on the debtor or hirer by the agreement as terminated, restricted or deferred' – this would in our view require service of such a notice if a funder wished to exercise the necessary contractual clause permitting it to curtail a customer's right to use of the asset, which would then entitle that customer to apply to the court for a Time Order restricting the exercise of that power;
3. 5.41.3The FCA requirements and oversight set out above would also apply, as would the oversight of the FOS; and
4. 5.41.4In respect of HP and CSA agreements, the CCA s140A Unfair Relationship regime referred to above would apply.

5.42In the circumstances, we believe there are statutory consumer protections in place, as overseen by the courts and the FCA, which would apply to the remote decommissioning of a heat pump system.

6. QUESTION 1B - DOING ADEQUATE CONSUMER CREDIT AND AFFORDABILITY CHECKS

6.1CONC 5 in the FCA Handbook is concerned with 'Responsible Lending'. In particular, CONC 5.2A requires all firms engaged in consumer lending to conduct a reasonable assessment of a customer's creditworthiness before entering into a regulated credit agreement.

6.2This assessment must be based on 'sufficient information' obtained from the customer and a credit reference agency, and take into account the risk that the customer may not be able to make repayments under the proposed agreement without it having a significant adverse effect on their financial situation. Specific guidance is given regarding acceptable sources of funds, the importance of priority expenditure, and the use of income/expenditure information in appropriate cases.

6.3Again, the Consumer Duty applies, and both firms and individual 'conduct staff' would be in breach of COCON if they were to act in a manner that was not designed to achieve 'good outcomes' for the consumer.

6.4CONC 5.2A only applies to credit agreements such as loans, HP and CS. It does not apply to hire agreements, or at least not directly. However, hire agreements are subject to the requirements of the Consumer Duty as much as credit agreements. As such, the need to ensure 'good outcomes' for a customer is equally applicable to their entering into hire agreements.

6.5Compliance with FCA requirements necessarily involves risk analysis; in particular, the risk that action or inaction on the part of a firm may cause customer detriment. The Rules and Guidance contained in the Handbook are not intended to cover every possible situation that may arise. Furthermore, the application of the Rules and Guidance that do exist will of necessity vary according to circumstances. For example, the extent of a 'reasonable' assessment of creditworthiness will differ according to the size and nature of the lending (and therefore the risk to the consumer if it is not 'affordable').

6.6As indicated above, there are different forms of regulated hire agreement, and it is pertinent to compare two real life examples:

1. 6.6.1The short term rental of a television set on an open-ended basis. The asset will have been purchased by the finance company, which will obviously look to recover the cost over time through the rentals it charges. However, the hirer is not committed to retaining the set for a minimum period of time that will ensure that the full cost is paid off.
2. 6.6.2The 'finance lease' of a car. In this case, the finance company will purchase a specific car chosen by the customer for the sole purpose of hiring it to that customer. The full purchase price of the car is paid off over the fixed period of hire (usually 3 or 4 years) in the same way as for an HP agreement. Strictly, the customer will never be the owner of the car, but:
   1. At the end of the fixed period of hire, the customer is free to keep using it as their own for as long as they want, subject to payment of a small continuing rental which does no more than cover the finance company's ongoing administrative expenses; and
   2. As and when the customer wishes to change cars, the majority of the sale price of the old car (usually 95%) will be payable to the customer by way of a 'rebate of rentals' so that it can be used as a deposit towards the new car.
3. 6.6.3Essentially, this form of finance leasing means that a customer obtains not only the use, but also the equity value of a car. The retention of title by the finance company preserves the tax status of the hire agreement, which is a necessary factor in the calculation of the rentals payable by the customer. However, that detail aside, this form of finance lease is effectively equivalent to an HP agreement.
4. 6.6.4Returning then to the Consumer Duty, it will be seen that the risk to a customer of entering into a car finance lease is essentially no different to entering into an HP agreement for the same car. The customer is making exactly the same commitment in terms of payment over the fixed period of hire, and will, if unable to meet the rentals falling due, suffer the same consequences, including ongoing liability for the full outstanding balance.
5. 6.6.5At the time the CCA was created, the market for consumer hire broadly consisted of open ended agreements along the lines of para 6.6.1. The market for the finance lease of higher value assets such as cars only came into existence much later. As such, the CCA consumer hire regime was constructed with open ended rental in mind; hence the omission of any protections for consumers similar to that for HP and CS mentioned in para 5.16.
6. 6.6.6This omission has been long recognised, and consideration of the need to 'upgrade' some forms of consumer hire to provide a similar level of protection to HP is part of the Government's ongoing review of changes to the CCA regime.
7. 6.6.7In the meantime, however, finance companies are fully aware of the similarities for customers between HP and hire based products such as finance leases, and have generally drawn the conclusion that it is hard to see why the FCA's requirements as to affordability should not apply equally to both, taking into account the same Consumer Duty need to ensure good outcomes for both sets of customers.
8. 6.6.8For that reason, notwithstanding that no FCA Rule specifically requires them to do so, finance companies do in our experience apply similar affordability assessments to finance lease customers as they would to HP customers.

7. QUESTION 1C - PROVIDING CLEAR AND TRUSTWORTHY INFORMATION ABOUT THE SALE

7.1In 2015, the Consumer Rights Act (CRA) consolidated, rationalised and expanded a hotchpotch of previous legislation in order to create a single set of rules applicable to all consumer contracts where goods or services are supplied, including sale, hire and HP.

7.2The explanation of these rules provided in this note is necessarily greatly simplified. It is intended only to provide a high level overview of the key consumer protections provided by the CRA, and the manner in which they operate within the current context (ie the financing of the supply and installation of a heat pump system).

7.3In consideration of this issue, it must be borne in mind that a finance company acting purely as a 'funder' will not be directly involved in the pre-contract discussions and negotiations with the customer regarding the anticipated performance of the relevant asset. As explained below, a TPO funder will technically become the 'supplier' of the asset for the purposes of the CRA. Nevertheless, the funder is in practice entirely reliant on the original marketplace supplier (referred to in this note as the Market Supplier where necessary to avoid confusion) to ensure that the asset which the funder purchases solely for the purposes of the finance contract has been properly designed and will perform in accordance with any express or implied representations that have been made to the customer by the Market Supplier.

7.4As such, whilst a funder may as part of the finance process take on responsibility for the quality and performance of the asset (as set out below), the fact remains that primary responsibility for the provision of 'clear and trustworthy information about the sale' lies with the Market Supplier. This is, of course, the position that applies where a customer makes a cash purchase of an asset.

7.5In the context of a TPO funding of a heat pump system, therefore, there are three potential 'suppliers' of goods and/or services:

1. 7.5.1the Market Supplier, who is primarily responsible for design and the making of pre-contract representations regarding performance;
2. 7.5.2the Funder, who is primarily responsible under the finance contract for the quality and fitness of the system, and for representations made by or on its behalf as to the nature and terms of that contract; and
3. 7.5.3the Servicer, who is primarily responsible for the ongoing maintenance and continued performance of the system.

7.6That said, it should be noted that a single firm may take on two or even three of these roles. For example, the Market Supplier could offer its own funding and provide ongoing maintenance, in which case it would be primarily responsible for all three of these elements.

7.7However, the distinction is important when considering the best way to ensure that consumers are given clear and trustworthy pre-contract information about the design and anticipated performance of a heat pump system. Pure funders are not experts in this field; they are in business to provide funding solutions for a wide range of assets, and have little or no expertise as regards the design and performance of the assets they fund.

7.8This being so, we suggest that any attempt to improve the standard of pre-contract consumer information regarding the design and performance of heat pump systems must inevitably focus on Market Suppliers, rather than funders,

7.9That is a subject that lies outside our expertise. Accordingly, we will turn our attention to the consumer protections that are specifically applicable to funders acting in that capacity.

7.10It will be helpful to consider first the base position of a pure sale to a householder paying cash from their own financial resources. In this case there will be a single 'Market Supplier' involved in the supply of a mix of goods (the constituent elements of the system) and services (the installation of that system).

7.11In respect of the supply of goods, the Market Supplier will be contractually obliged to ensure that those goods meet certain prescribed standards. In particular, the goods must:

1. 7.11.1Be of 'satisfactory quality' that is, they must meet the standard a reasonable consumer would regard as satisfactory, bearing mind specified matters, including:
   1. fitness for all the purposes for which goods of that kind are usually supplied;
   2. safety and durability;
   3. freedom from defects;
   4. the price paid;
   5. the reasonable expectations of the consumer given pre-contract advertising and any specific representations made by the trader;
2. 7.11.2be fit for any particular purpose indicated by the consumer in pre-contract discussion; and
3. 7.11.3match any pre-contract description on which the consumer relies.

7.12As regards the supply of services, these must be performed with 'reasonable care and skill', and in line with any information provided by the Market Supplier in advance.

7.13The CRA gives the consumer a range of redress options should:

1. 7.13.1the Market Supplier fail to meet these standards, which cover both the contractual supply of the goods/services and any non-contractual representations made by the trader regarding the performance of the system prior to the entry into that contract; and/or
2. 7.13.2Either the installation or maintenance of the system fall below the required standard.

7.14These redress options include:

1. 7.14.1the rejection of goods supplied; and/or
2. 7.14.2the right to compensation if either the goods or the services supplied are sub-standard.

7.15How this base position applies to a funded installation will depend on the exact circumstances of the transaction. The basic CRA protections and remedies outlined above apply equally to sales and TPO arrangements. However, additional protections would apply, depending on what sort of funding is provided, and by whom.

7.16We will consider 5 scenarios, in which the party making any pre-contract representations will be referred to as X, and the party providing the funding will be referred to as Y:

1. 7.16.1Scenario A - X and Y are the same party;
2. 7.16.2Scenario B - Y has no relevant connection with X;
3. 7.16.3Scenario C - Y has a relevant connection with X and provides funding in the form of a loan agreement or via a credit card;
4. 7.16.4Scenario D - Y has a relevant connection with X and provides the funding in the form of an HP or CS agreement; and
5. 7.16.5Scenario E - Y has a relevant connection with X and provides the funding in the form of a hire agreement,

7.17Scenario A would apply where the customer deals with a firm that is both a Market Supplier of heat pump systems and is able to provide its own funding. This funding could be by way of 'credit sale' (where ownership of the goods would pass at the time of contract but the customer is given credit terms for the payment of the cost of supply/installation), HP, CS or hire.

7.18For these purposes, the CRA draws no relevant distinction between these different forms of funding - in case of HP, CS and hire agreements, the same standards for the supply of goods will apply and the relevant trader will also be directly responsible for any pre-contractual representations in the same way as if the customer had paid cash.

7.19It is important to note, however, that the relevant Market Trader for these purposes may or may not be the party with whom the customer first makes contact. It is not uncommon for smaller local traders who specialise in the installation of heating systems to introduce customers to larger traders who have the necessary MCS certified expertise to be able to design and supply a heat pump system tailored to an individual householder's requirements.

7.20In these circumstances, the smaller trader may be involved in the transaction; perhaps by carrying out on-site installation. However, that would only be on a sub-contract basis, with the larger firm engaging directly with the customer, designing the system, making the pre-contract representations as to performance, contracting directly with the customer for the supply and installation of that system, and (in some but not all cases) providing some form of finance solution for those unable to pay by cash.

7.21Scenario B would apply where the customer makes their own funding arrangements through a party having no 'relevant connection' to X.

7.22The classic example of these arrangements would in practice be where the customer obtains a loan from an unconnected party (such as a bank) to pay for the heat pump system. In this case, the transaction would remain entirely between X and the customer. The funding would provide the customer with a source of cash, but the funder would have no liability for the heat pump system or its performance.

7.23It might also be the case, though more unusual, that the customer arranges an asset finance facility with a funder that is unconnected to the Market Supplier. If this were to occur, the funder would purchase the goods and become the supplier of them to the customer under the finance agreement (whether HP, CS or hire). The funder would then be subject to the standard contractual liabilities under the CRA, but would not normally be responsible for any pre-contract representations made by X

7.24Scenarios C and D involve 'connected lender' liability. In this context, a relevant connection would mean where either

1. 7.24.1X acts as a credit broker for the finance by introducing the customer to Y for the purposes of the potential provision of credit; or
2. 7.24.2X is party to arrangements under which the customer is able to use a credit card facility to make payment to X.

7.25The CCA contains two key provisions under which a connected lender may be liable to the customer for issues arising out of the transaction. These provisions are complex, but in very simple terms:

1. 7.25.1s56 provides that any negotiations conducted by;

   1. a credit broker leading to the making of an asset finance credit agreement in respect of goods sold to the funder by the broker; or
   2. a supplier in relation to a transaction funded by a connected lender loan or credit card facility,
   will be deemed to be conducted as an agent of the funder; and

2. 7.25.2ss75 and 75A provide that if a debtor under a connected lender loan or credit card facility has a claim against a supplier in respect of a transaction financed by such a credit agreement, the funder will be jointly liable,

7.26Sections 75 and 75A do not apply in every case; for example, s75 does not apply if the cash price of the transaction exceeds £30,000, and s75A only applies where the cash price exceeds this figure but the amount of credit is no more than £60,260. Nevertheless, it is reasonable to assume that one or other provision would apply to the vast majority of consumer heat pump transactions.

7.27In Scenario C the funder would only be advancing credit to the customer to enable payment of their contractual liability to X and would not themselves take on any direct contractual liability for the goods, their installation or their performance. However, the funder would be jointly liable under s75 or s75A to compensate the customer for any claim they had against X, whether for breach of contract or misrepresentation. In addition, the funder would be liable under s56 for any representations made by X as their deemed agent during the antecedent negotiations.

7.28In Scenario D, the funder would purchase the assets from X and contract to sell them to the customer under an HP or CS agreement. The funder would be the supplying 'trader' of the assets under the CRA, with direct contractual liability for their quality and general performance. In addition, the funder would be liable under s56 for any representations made by X as their deemed agent during the antecedent negotiations.

7.29The position in Scenario E would be similar as regards the hire of the assets, with the funder being the supplying trader under the CRA. However, as indicated above, the CCA does not always equate hire and credit agreements, and the deemed agency in s56 does not apply to cases involving the hire of assets.

7.30That at least is the theory. Unfortunately, as has been seen in the past in connection with the finance of eco- assets such as solar panels, the application of these consumer protections can be difficult in practice.

7.31As indicated above, the role of asset finance funders is to provide finance; that is where their expertise lies. They are not experts in the myriad of different underlying products for which they provide finance. They are as much reliant on the expertise of the specialist Market Suppliers to ensure that the assets will measure up to reasonable customer expectations as are the customers who ask them (the funders) to put their (the funders) money at risk by entering into the proposed finance arrangements.

7.32For that reason, when a problem involving quality and/or performance occurs, funders are entirely reliant on the relevant Market Trader to accept or deny the validity of any claim raised by the customer, whether for contractual breach or alleged misrepresentation. It should also be noted that funders do not benefit when customers encounter issues - it interferes with their payment streams (cash flow), places their capital at risk, and creates additional cost.

7.33That is not to say that funders do not accept their responsibilities. Indeed, they would be held to account by the courts and/or FCA if they failed to do so. However, it is important to bear in mind that:

1. 7.33.1when consumers suffer issues with funded assets, so do the funders; and
2. 7.33.2the ultimate responsibility for those issues lies with the Market Suppliers who create them by failing to deliver in accordance with the customer expectations they have (wittingly or unwittingly) generated.

7.34In the circumstances, we believe that the fundamental cause of customer issues in the past has not been the use of finance arrangements; rather, it has been the failure to ensure that the Market Suppliers of the underlying products are sufficiently competent and regulated as to be willing and able to deliver in accordance with reasonable customer expectations.

7.35If nothing else, it should be noted that the absence of available finance arrangements will not in itself protect customers from any shortcomings on the part of Market Traders. Rather, it will just mean that:

1. 7.35.1those customers who do install a heat pump system will be dealing with those same traders direct for cash; and
2. 7.35.2as a result, the number of customers who can afford to install a heat pump system will be lower.

7.36All that said, we should make it clear that we are not suggesting that suppliers of heat pump systems are in any way failing consumers. We are simply suggesting that blaming finance companies for past issues with eco-asset projects is misconceived. Protections exist for consumers who take out finance, but both customers and finance companies are reliant on the underlying Market Suppliers to deliver on quality and performance in line with representations made.

7.37Finally, before leaving this section, we should mention the consumer protection arrangements in place to ensure that customers are provided with adequate information by funders regarding the finance arrangements themselves; in particular, as regards the charges raised for both the finance and any additional maintenance arrangements provided by the funder.

7.38Consumer credit legislation effectively prescribes a complicated suite of documentation which must be presented to a customer before a regulated agreement can be regarded as properly executed. If these requirements are not strictly followed, the agreement will be unenforceable against the consumer without a court order. [Note – unenforceable does not mean illegal; the contract is still valid, but requires court sanction if the funder needs to enforce its rights as the result of default by the customer].

7.39The detail of this documentation is outside the scope of this note. However, we would summarise it as follows:

1. 7.39.1The contract must set out prescribed information regarding key terms, such as what must be repaid over what period - this information must be 'up front' and prominent (ie not tucked away in the detailed terms and conditions);
2. 7.39.2Before executing the contract, the consumer must be given written 'pre-contract information', again highlighting the key terms; and
3. 7.39.3Again in advance of signing, the consumer must be given an 'adequate explanation' of key terms in accordance with FCA Handbook requirements (CONC 4.2.5R).

7.40Strictly, the last of these is only mandated by the FCA for credit agreements. Nevertheless, for essentially the same Consumer Duty reasons set out in paragraph 6.6.7, it is now in our experience commonplace for asset finance hire companies to provide such an explanation.

7.41As regards credit agreements, the amount of credit must be stated – ie the actual 'cash price' of the relevant asset, less any deposit paid in advance by the customer towards that price. In addition, the interest rate payable and the Annual Percentage Rate of charge (APR) must be stated, along with a numerical break down of the charges that will be due over the term. If the funder is also agreeing to supply maintenance services, the periodic cost must be separately detailed.

7.42As regards hire agreements, no credit is being given and, strictly, the customer is not being charged interest. The asset finance company will, in practice, calculate the rentals so as to recover over the lease period both the initial cost of the asset and a return on investment equivalent to interest, but only the aggregate rental is required to be shown. However, in the context of asset finance leasing the customer will inevitably be aware of the actual cash price, as the initial discussions with the Market Supplier will have involved the provision of a price for a cash purchase. Again, if the funder is also agreeing to supply maintenance services, the periodic cost must be separately detailed.

7.43In addition to key terms, regulated agreements are required to provide specified consumer protection information; in some cases, the wording of these explanations is prescribed. So, for example, HP and CS agreements are required to include prescribed wording detailing the consumer protection against repossession set out in paragraph 5.16.

7.44At this point, it is probably worth mentioning another consumer right applying to HP and CS agreements, usually referred to as 'voluntary termination' (VT). At any time before the agreement is terminated (on expiry or by the funder), the customer is entitled to give notice to terminate themselves. If they do so, they are required to return the asset but their financial liability is limited to:

1. 7.44.1the amount of any accrued arrears;
2. 7.44.2such payment as may be required to bring the total paid up to the figure of one half of the total amount payable under the agreement in respect of the finance; and
3. 7.44.3if the asset has not been looked after properly, any sum required to put it into reasonable condition (ie fair wear and tear only excepted).

7.45In the context of heat pump financing, the application of this provision (often referred to as the 'one half rule') is still somewhat obscure. Strictly it applies. On the other hand, it must be questionable whether the customer would be able to comply with the requirement to deliver up the system.

7.46The one half rule does not apply to hire agreements. As mentioned above, when the CCA was drafted, there was little asset finance hire funding available in respect of consumer assets. This being so, the equivalent right set out in s101 (built around the concept of asset rental) provides that a hirer may give notice to terminate at any time, but not to expire within the first 18 months of the agreement. It should be noted that this right does not apply if the aggregate of payments falling due under the hire agreement in any year exceeds £1500.

7.47The one half rule is seen by consumer advisers as an important right, enabling consumers in financial trouble to limit their liability under an HP/CS agreement. That view has a certain level of truth. Unfortunately, the experience of asset finance funders is that in the majority of cases the right of VT is used by customers to escape from liability to pay the full contractual balance when they are really just wishing to get out of the agreement in order to enter into a new agreement for a replacement asset.

7.48Be that as it may, the fact that the right of VT does not apply to hire agreements is sometimes criticised by consumer advisers, who argue that this means the customers liability is 'uncapped'. This isn't quite accurate for asset finance hire, as a customer's liability is capped, because only the required rentals are payable over a fixed or minimum period of hire. What the consumer advisers really mean is that an asset finance hirer does not (unless the right set out in paragraph 7.46 applies) have the right to reduce their liability to pay those fixed rentals.

7.49Asset finance funders would argue that this is perfectly fair and reasonable. As explained in section 3, such funders only purchase the relevant assets at the request of the customer, and on the understanding that their expenditure will be repaid under the hire agreement. If the agreement is terminated early under either the one half rule or s101, the finance company's only recourse in respect of the unpaid balance is sale of the asset, which is clearly not going to be adequate as regards soft assets such as heat pump systems (never mind the cost of removal).

7.50Indeed, funders believe that both the one half rule and s101 should be removed as part of the Government's ongoing project to generally update CCA law, on the basis that there are now more modern requirements in place to ensure that consumers are adequately protected in the event of unforeseen financial distress; in particular the FCA CONC rules on 'forbearance' and the Consumer Duty.

7.51All that said, it is highly unlikely that changes to the CCA regime will be implemented in the near future.

8. QUESTION 1D - AVOIDING UNFAIR CONTRACTUAL CLAUSES

8.1Under the Consumer Rights Act 2015, where a consumer (meaning for these purposes someone acting predominantly outside their business or profession) enters into a contract on the standard terms of a trader (which includes a funder), the trader must ensure that those terms strike a fair balance between their own interests and those of the consumer. In respect of financial services contracts, the FCA is the regulator empowered to ensure that this requirement is met by authorised firms.

8.2Guidance on the appropriate application of the requirement by such firms is contained in the UNFCOG section of the FCA Handbook, which provides that contract terms are unfair if, contrary to the requirement of good faith, they cause a significant imbalance in the parties' rights and obligations to the detriment of the consumer. The requirement extends not only to the drafting of a term, but also to its transparency, and to the way in which it might be used by a firm in practice.

8.3That said, the majority of the detailed guidance applied by the FCA in respect of Unfair Terms is actually provided by the Competition and Markets Authority. This guidance details:

1. 8.3.1Terms that are banned altogether; and
2. 8.3.2'grey' terms that are not inherently unfair, but may be so if wrongly drafted or applied in practice.

8.4It should also be noted that the CRA and CCA both outlaw any attempt by a trader to use contract terms to directly or indirectly exclude or limit the statutory consumer rights created by those Acts.

8.5The FCA has (and has exercised) the power to require firms to amend unfair terms and can apply to the court for an injunction to restrain the use of a term if necessary. Failure by a financial services firm to comply with the Unfair Terms requirements would in addition amount to a breach of the Consumer Duty. Consumers adversely affected by unfair terms are able to seek redress from the Financial Ombudsman.

9. QUESTION 1E - AMENDING CONTRACTS AFTER AGREEMENT

9.1The amendment of the terms of any contract can occur in one of two ways:

1. 9.1.1One or other of the parties exercises a power within the original contract which allows it to unilaterally make changes; or
2. 9.1.2The parties enter into some form of supplemental agreement to change the original contract.

9.2The FCA issued guidance in 2018 confirming that the inclusion of a power in a contract allowing a firm to unilaterally change the terms is not regarded as inherently unfair; there are good reasons for, and benefits to consumers from, allowing such terms, particularly in long term contracts. However, such terms must be objectively fair when judged against a number of specific factors; for example, the potential scope of change must be no wider than is reasonably necessary to achieve a legitimate purpose, such as changes in law or to reflect increased costs incurred by the firm.

9.3Lastly, it is possible that the terms of a contract may provide for an automatic adjustment of the performance of the contract in specified circumstances. Strictly, this is not an amendment to the contract; rather, it is merely an application of the existing contract terms. Nevertheless, a term providing for such adjustment would of course need to satisfy the Unfair Terms legislation

9.4As regards the contractual amendment of a regulated agreement, the parties are free to do so at any time. However, the procedure for doing so is governed by s82 CСА.

9.5In brief, any agreement to (as the CCA puts it) modify the terms of a regulated agreement has the effect of revoking the original agreement and creating a new regulated agreement incorporating the combined terms of the two agreements.

9.6Essentially, the process to create a modified agreement follows the same pattern as that for any regulated agreement, with specific CCA rules as to both the form, content and execution of the necessary documentation, and the information that must be provided to the customer in advance.

9.7In addition, the terms of any modified agreement would be subject to the same Unfair Terms legislation and FCA requirements as the original agreement.

10. QUESTION 1F - ENABLING EARLY TERMINATION / PREPAYMENT, MOVING HOUSE ETC

10.1As indicated above, asset finance agreements (HP, CS and finance lease) are constructed by funders on the basis that the customer takes responsibility for the repayment of the initial cost of the asset. From the customer's perspective, this is in financial terms no different to obtaining a loan to purchase the asset direct.

10.2In all such cases, the finance agreement will provide for the customer to make payments that will, over the agreed term, repay the funder's initial expenditure (be it the cost of the asset or the amount lent) together with charges which reflect the funder's additional business expenses (including the cost of funds), the risk of lending, and a level of profit.

10.3For regulated consumer finance, it is a requirement of the FCA's Consumer Duty that these charges must represent 'fair value' for the financial service that is being provided.

10.4The early settlement of regulated loans and asset finance agreements is commonplace. If the customer wishes to accelerate full payment of the outstanding liability, the funder will require payment of the balance, less a rebate of charges to reflect the fact that repayment is taking place before the full period for payment has expired.

10.5For regulated credit agreements, the CCA prescribes a settlement formula which the funder must apply. No similar requirement exists for lease agreements. However, lease funders have typically allowed a discount on future rentals to take account of accelerated receipt, and the courts have on numerous occasions validated this approach by confirming that the contract terms would otherwise be unfair.

10.6In either case, the funder would on settlement have received full payment under the asset finance agreement. For HP and CS, this would result in the transfer of title to the customer, who would then be able to pass ownership to the new householder as part of the sale of the house. The position would be slightly different for a lease. As indicated above, the funder would not generally be able to pass title to the lessee. However, the funder would be able to pass title direct to the new householder.

10.7As such, the mechanism exists within the funding market to deal with early termination by the customer of an asset finance agreement funding the acquisition of a heat pump system. However, it is recognised that this may not be the preferred solution of a householder on sale of the relevant property.

10.8An available alternative would be for the ongoing liability under an asset finance agreement to be effectively transferred to the house purchaser. Essentially, this would require the creation of a new regulated agreement with the house purchaser covering payment of the outstanding balance over the outstanding period for repayment.

10.9Such an approach would be in line with the requirements of the Consumer Duty but might not be possible in every case. The incoming householder may not be willing to take over the financial contract; it might also be the case (though in practice probably unusual) that the funder would for some reason not consider them to be an acceptable customer.

10.10Partial repayment is also possible, at least as far as HP and CS are concerned. The CCA confirms a debtor's right to make partial early repayment, and prescribes a formula for calculation of the partial rebate of charges that would be applied.

10.11The situation is more complicated for lease agreements. In principle, it would be possible to recalculate future rentals payable to reflect partial early repayment. However, the mechanism for applying that change would be more costly than for HP and CS, because the funder would be required to use s82 CCA to formally modify the agreement (the change in future payments consequent on the partial early settlement of a credit agreement is specifically excluded from the ambit of s82, but the same is not true for hire).

10.12We also note the concerns raised about funders creating barriers to the sale of properties, with references to the issues encountered with the 'rent a roof' arrangements. These lease arrangements involved the grant by homeowners to third parties of specific property rights which were capable of affecting title to the relevant house. We do not consider that similar issues would apply to TPO funding, where the lease would involve the grant to the homeowner of asset rights which would not impact title to the house.

10.13We recognise that the need for a houseowner on moving house to either settle existing TPO finance or transfer it to the purchaser might create an issue at the time requiring resolution between the various parties. However, we consider that there are consumer protections in place:

1. 10.13.1The requirements for provision of pre-contract information by a funder include highlighting 'features of the agreement which may operate in a manner which would have a significant adverse effect on the customer in a way which the customer is unlikely to foresee' (FCA Handbook CONC 4.2.5R);
2. 10.13.2Contractual terms governing the process would need to take account of the houseowners interests in accordance with Unfair Terms requirements; and
3. 10.13.3The FCA Consumer Duty would require a funder to deal with the issue in a manner that delivered a 'good outcome' for the householder.

11. QUESTION 2 – POTENTIAL EFFECT OF PROHIBITING REPOSSESSION

11.1Ownership of an asset is not a unitary right; rather, it consists of a bundle of rights including those of use and possession.

11.2As such, ownership is to some extent divisible. For example, the owner of an asset can permit another party to enjoy the use and possession of it. This arrangement may be voluntary, or may be contractual, as when an asset is subject to an asset finance or rental agreement. However, this transfer of the immediate right of use and possession to the customer does not affect the existence of the owner's wider right of ownership.

11.3On the other hand, there are circumstances in which the loss of the right to possession effectively becomes a loss of ownership, For example, where goods are sold by a bailiff under a court order, or a motor vehicle subject to HP is wrongfully sold by the debtor to a 'innocent purchaser', or the owner's right to claim possession is statute barred by passage of time.

11.4The right to maintain and recover possession of an asset as against all other persons is a key element of the right of ownership; if it is permanently lost, then the right of ownership is effectively lost as well.

11.5When a finance company enters into an asset finance contract, be it hire, HP or CS, it gives the customer a contractual right to use and possess the relevant asset for a specified period. However, the finance company's right of possession is not lost permanently; it is only in suspense. When the specified period ends, the customer's right of possession ends and the finance company's residual right of possession is restored.

11.6If that is at the end of the agreed period, and the customer has made all the agreed payments, then:

1. 11.6.1if the agreement is HP or CS, ownership of the asset transfers to the customer and the finance company's right to possession ends permanently; or
2. 11.6.2if the agreement is one for hire, the finance company's right to possession means that it is entitled to recover possession from the customer.

11.7As explained above, when the hire agreement is a finance lease, the initial cost of the asset is repaid by the customer over an agreed period. When this period ends, the terms of the agreement may provide for the asset to be returned straight away. However, it is also commonplace for these payments to be made during a fixed minimum period of hire, after which the customer is entitled to continue the lease for a secondary period of hire, during which their right to use and possession continues on the basis of a nominal (peppercorn) rental payment. Nevertheless, the finance company's residual right of possession is technically preserved until such time as the secondary period ends (and there is no reason why it should not be for the usable life of the asset),

11.8More importantly, in all these cases, the finance company has the right at any stage to terminate the customer's contractual right to use and possess the asset if the customer defaults on their obligations (usually by failing to pay rentals falling due), at which time the finance company's right of possession revives.

11.9As explained above, a finance company may not in practice enforce this reinstated right to possession. Nevertheless, the existence of this right is a fundamental element of the asset finance agreement, which is key to the retention of ownership by the finance company.

11.10This is particularly important for hire agreements, because the accounting basis that underpins their tax treatment by HMRC is reliant on there being no intended ultimate transfer of ownership to the hirer.

11.11In the circumstances, a general loss of the right to repossess is viewed with great concern by finance companies, as it may undermine the whole basis on which their funding arrangements are premised. Unless and until the issue has been considered by a court, no-one can be sure whether that concern is justified.

11.12However, in the absence of any court guidance, this concern would have two practical results:

1. 11.12.1Finance companies would be reluctant to enter into finance agreements in respect of heat pump systems, because a court decision might undermine the whole basis for their finance arrangements and the tax arrangements that underpin them; and
2. 11.12.2That in turn might impact on the ability of those companies to obtain funding in the wholesale market at rates that would allow them to enter into finance agreements at a competitive rate of charge.

11.13The use of asset finance agreements as a mechanism for the funding of heat pump systems is predicated on the basis that it can present a more cost-effective approach than alternative sources of funding. This potential benefit for householders may therefore not become available in the future if the ultimate right of a TPO to repossess the asset is removed, if only because of the legal uncertainty that such an approach would create.

12. QUESTION 3 - THE EFFECTS OF FUNDER INSOLVENCY

12.1As with any commercial undertaking, finance companies sometimes cease to trade, whether on a solvent or insolvent basis. Exactly what happens then is up to the directors of the company and/or an appointed Insolvency Practitioner. However, it is worth noting up front that this event would not in practice lead to the termination of the finance agreements entered into by the company.

12.2Rather, the income stream which those agreements represent would (in theory at least) amount to an asset of the company which could continue to be collected for so long as the cost of collection activity made it commercially viable to do so. Broadly, this process could take two forms:

1. 12.2.1The company itself would continue to collect payments falling due from customers; and/or
2. 12.2.2At some stage, the book of live agreements could be sold to another business for subsequent collection.

12.3It is, however, necessary to also take into account the duties owed by the finance company to its customers, not least because the collection of ongoing payments would not be practicable if and to the extent that the company is in breach of its own contractual obligations to its customers.

12.4Three basic scenarios can be envisaged:

1. 12.4.1The company has entered into pure asset finance agreements, with no responsibility for ongoing maintenance or servicing. In this case, the company can comply with its obligations by simply continuing to provide its customers with use and possession of the assets.
2. 12.4.2The company has entered into asset finance agreements (whether hire, HP or CS), but has also set up distinct and separately priced arrangements to provide maintenance and servicing. In this case, the company could decide to continue to provide those services and charge for them. Alternatively, if it chose not to do so, it would clearly not be able to charge for those services, but could potentially continue to charge for the pure finance element of its agreements with customers (subject to applying any necessary discount to compensate customers if the market cost of obtaining replacement services was higher than the contractual charges).
3. 12.4.3The company has entered into rental agreements, under which a single monthly payment is due in respect of both the use of the assets and their maintenance/servicing. In this case, the company could again decide to continue to provide those services and charge for them. The alternative would be to seek to recover only reduced payments from customers, in respect of the financing element of the rental payable. That would, however, be much more difficult to achieve in practice, in the absence of the clear pricing distinction applying in paragraph 12.4.2 circumstances. This might well make any attempt to do so commercially impracticable.

12.5The key factor to bear in mind when considering these scenarios is that neither a cessation of trading nor even insolvency acts to release an authorised firm from its regulatory obligations. The firm and its senior managers (and/or any appointed Insolvency Practitioner) will continue to be subject to FSMA oversight until such time as the FCA consent to deauthorisation, which they will only do if satisfied that the company's affairs have been wound down in a manner that takes account of the legitimate interests of its customers.

12.6As such, the Consumer Duty obligation to ensure 'good outcomes' for customers will continue to apply. It is, in addition, not legally possible for regulated agreements to be transferred to a third party that is not itself FCA authorised. Clearly, if the company is insolvent, funds to comply fully with contractual obligations may simply be not be available. However, the company would still be required to take all reasonable steps to arrange for its customers to be left in the best position possible in the circumstances.

12.7In practice, therefore, it is not conceivable that the FCA would permit steps to be taken that were directly adverse to customer interests, such as:

1. 12.7.1Continuing to require payments to be made without the performance of any relevant obligations;
2. 12.7.2Sale of the payment stream and/or the relevant assets to a third party without transfer of the accompanying obligations; or
3. 12.7.3Termination of agreements and the repossession of assets.

12.8In any event, as regards the last point, the comments set out in section 5 above regarding termination and repossession during the lifetime of the company would still apply. Consumer protections would continue, and as a matter of commercial reality no finance company (particularly if insolvent) is going to spend large sums of money trying to repossess assets with no real sale value.

12.9As indicated above, a finance company that is in wind down may continue to collect payments from customers, sometimes for many years. Ultimately, however, particularly if the company is insolvent, trading activity will cease once the benefit to the company is outweighed by the cost involved. At this stage the company would have no commercial interest in pursuing either further payment from the remaining customers or recovery of the financed assets.

12.10The company might then take formal steps to transfer ownership of any remaining assets to the relevant customers. Alternatively, it may just indicate that it is effectively abandoning any claim to either the assets themselves or future payment for their use.

12.11Overall, therefore, whilst we have no doubt that the insolvency of a TPO finance company would inevitably create some concern for the affected customers, we believe that the consequences would in practice be far less problematic than might be feared. In many cases, the contractual arrangements would be unaffected, at least in the shorter term; in others, the customers would have to find alternative suppliers for maintenance and servicing but would not be required to pay twice for these services, and in all cases, customers would continue to have the use and possession of the funded assets.

13. SUPPLEMENTING CONSUMER PROTECTION

13.1As outlined above, we believe that substantial consumer protections already exist to address the concerns regarding the proposed extension of the BUS to TPO structures that we understand have been raised by some consumer protection groups. Nevertheless, we appreciate that such groups may have ongoing concerns regarding a number of issues and the potential for 'bad actors' to circumvent the existing protections.

13.2We believe this is unlikely in practice. Any asset funder engaging (legally) in consumer credit activity would be regulated and overseen by the FCA, who would require compliance with their Handbook Rules and Guidance (including the Consumer Duty), as well as the various CCA and Unfair Terms requirements applicable.

13.3We also note that one of the key concerns raised is whether a heat pump system as delivered will perform in accordance with the representations made to a consumer in advance. However, as set out above, such representations will in practice be made by the relevant Market Supplier. A TPO funder would assume a certain level of responsibility for any misrepresentation, in accordance with existing consumer protections. However, we believe that the focus for dealing with this consumer risk should really be directed at Market Suppliers, rather than at funders.

13.4To an extent, this is already the case, given that the BUS requires such Market Suppliers to comply with a number of eligibility criteria. As such, we would suggest that some form of oversight by Ofgem would be the most appropriate way to address this particular concern.

13.5As regards concerns that might perhaps be addressed by funders, we consider it unlikely in practice that the FCA would currently have the bandwidth to create any new Handbook Rules or Guidance tailored for these circumstances. However, we believe the existing Consumer Duty requirements could be indirectly utilised by DESNZ for this purpose,

13.6As explained above, this duty requires funders to act to deliver 'good outcomes' for consumers in line with their (the consumers) reasonable expectations. In practice, these expectations are, in part at least, created by the form and nature of the financial products created by funders, and by the 'financial promotions' that induce customers to utilise those products.

13.7In our view, it would be practicable for DESNZ to compile a list of approved consumer practices that any TPO funder wishing to provide finance linked to the BUS would be required to follow. Funders would, of course, be free to not provide BUS linked finance if they did not wish to adopt those practices. However, the BUS status of any installation would be conditional on the funder's undertaking to do so.

13.8We further believe that the FCA would regard funders as liable under the Consumer Duty to ensure that any reasonable consumer expectations which have been created as part of the stated form and nature of a government scheme to which the funder has voluntarily subscribed are met.

13.9Such an arrangement would, of course, not have the same direct effect as would statutory consumer protection. Nevertheless, it would potentially create an indirect form of FCA oversight, to which funders would need to 'buy in' if they wished to provide BUS TPO funding.

13.10Creation of the relevant 'code' would require some thought. It would be pointless to create a list of approved practices that would be considered as too onerous by funders. In practice, they would simply not sign up to the scheme, which would make the approach pointless and mean that consumers would not be able to benefit from the use of TPO funding arrangements.

13.11That said, there are a number of consumer concerns identified by DESNZ and considered in this note which might be alleviated by such a voluntary approach. By way of example only, concerns regarding the retention of a funder's ultimate right to repossess a heat pump system could be offset by an undertaking from scheme funders to do so only in extreme circumstances and in