Consumer credit regulation in the UK is fragmented, cumbersome and disjointed, complex and incoherent. These are all adjectives used by the Government to describe the UK's consumer credit regime in HM Treasury's recent consultation on the reform of the Consumer Credit Act 1974 (CCA).
In the almost 50 years since the CCA was introduced not only has the market which it regulates changed significantly, so too has the way in which financial services are regulated. The FCA's flagship initiative, the Consumer Duty – a package of a new consumer duty principle, flanked by three cross-cutting rules and four outcomes rules, and supported by non-Handbook guidance - is a perfect example of how financial services regulation has developed since the CCA was introduced. Coming into force in July this year (for existing products and services, with the closed equivalents following 12 months later), the Consumer Duty clarifies and raises the regulator's expectations for the standard of care which all financial firms must provide to retail customers, and requires firms to act to deliver good outcomes for these customers.
The Consumer Duty had not been formulated at the time the FCA's produced its 2019 report (Retained Provisions Report) on the parts of the CCA which remained in legislation after the limited 2014 transfer of consumer credit regulation to the FCA. The objective of the Retained Provisions Report was to assess whether or not the repeal (in whole or in part) of the remaining CCA provisions would adversely affect the appropriate degree of protection for consumers and also required the FCA to consider which CCA provisions could be replaced by FCA rules or guidance.
While the Retained Provisions Report did not take into account the protections provided by the Consumer Duty, it is clear from HM Treasury's consultation that the Consumer Duty will impact and influence the reform of the CCA.
HM Treasury's consultation adopts the Retained Provisions Report's tripartite categorisation of the remaining CCA provisions, namely information requirements, rights and protections and sanctions. While the clearest overlap between the requirements of the CCA provisions and the Consumer Duty is in relation to information requirements, the Consumer Duty's consumer protections will impact the wider reform. We look at each in turn below.
CCA information requirements and Consumer Duty consumer understanding outcome
Under the Consumer Duty's consumer understanding outcome firms must provide customers with the information they need, at the right time and presented in a way which they can understand so that they can make informed decisions. Not only do communications need to be clear, fair and not misleading but they must also support customers' information needs and be understood by the customer who receive them, and equip those customers to make decisions that are effective, timely and properly informed.
Communications must be tailored taking into account the characteristics of the customers intended to receive the communication, including any vulnerability characteristics, the complexity of products and the communication channel used. Firms have to test, monitor and adapt communications to support understanding and good outcomes for customers.
CCA rights and protections and Consumer Duty requirements
Under the cross-cutting rules of the Consumer Duty firms must act in good faith towards retail customers, avoid causing foreseeable harm to retail customers, and enable and support retail customers to pursue their financial objectives. A Consumer Duty culture of ensuring the delivery of good outcomes for retail customers has to be embedded in firms' culture. If firms cause harm to retail customers the Consumer Duty requires them to proactively take action to rectify the situation.
The Consumer Duty as a context for CCA reform
While the Consumer Duty raises the expectations as regards consumer protection and requires the delivery of good outcomes for retail customers, it does not cover all aspects of the remaining CCA provisions. For example, the Consumer Duty neither facilitates redress for consumers nor replicates the sanctions of unenforceability, which are a hallmark of the CCA regime.
The provisions of the Consumer Duty reflect the modern regulatory approach. As such, arguably, they provide a good context in which the detailed provisions of the CCA can be considered. For example, the consumer understanding outcome obligations on firms may be sufficient, or at least go some way to protect consumers and avoid foreseeable harm without the need for the rigidly prescriptive CCA information. HM Treasury is clear that while all CCA provisions will be reviewed and updated as part of the reform, where provisions can be transferred from the CCA to FCA rules or guidance the intention is to recast rather than necessarily to replicate provisions in their current form. The prescriptive nature of certain aspects of the CCA regime will be reviewed with modern regulatory eyes. The challenge will be finding the right balance between flexibility and prescription; customers need to be reliably provided with the information they need in order to make informed financial decisions.
The Consumer Duty reflects modern, customer-centric, outcomes-focused regulation, where firms must know and understand their customers in order to be compliant. This backdrop to the CCA's review will enable the Government to simplify the behavioural framework which firms must adhere to in order to deliver good outcomes for customers, and that is to be welcomed.
HM Treasury's Consultation closes on 17 March 2023 and is the first step in a reform programme which is expected to take a number of years. The Government will set out the next steps for CCA reform after the consultation responses have been reviewed.
For more information on the keys aspects of HM Treasury's consultation see our blog here.
For more information on key aspects of the Consumer Duty see our blog here.