As part of its programme of regulatory overhaul, the UK government confirmed in June of last year its commitment to reform of the UK's consumer credit regulatory regime. As the first step of this commitment, and part of the Edinburgh Reforms package, HM Treasury has now issued its initial consultation on this reform.
The need for reform
For the last fifty years the Consumer Credit Act 1974 (CCA) has been central to the regulation of the UK consumer credit market. It was a landmark piece of legislation at its time, replacing a confusing and disparate framework with new and comprehensive protections.
But the existing regulatory landscape has become far too complex, disjointed and cumbersome for consumers and businesses. The CCA has been changed on a number of occasions (both as a consequence of EU directives and domestic changes). Now, following the 2014 transfer of consumer credit regulation to the FCA, the CCA and the various pieces of secondary legislation made under it sit alongside the FCA rules for firms in the Consumer Credit Sourcebook, leading to a complex and disparate framework of consumer credit regulation. As a result, in June 2022, the government announced its intention to address this issue by undertaking reform of the CCA, with the ambition of moving the majority of the CCA from statute to FCA rules.
The CCA also reflects an older style of regulation and is at odds with the modern approach to regulation in the Financial Services and Markets Act 2000 (FSMA) and with the more outcomes-focused regulation set out in the new Consumer Duty (which we have written about here). The Financial Services and Markets Bill, currently before Parliament, implements the outcomes of the Future Regulatory Framework (FRF) Review to establish a comprehensive FSMA model of regulation (where the expert and independent financial services regulators have greater responsibility for setting regulatory requirements that apply to firms) and the CCA reform will be aligned with this approach.
Objectives and principles underlying the reform
The key objective underpinning the reform of the CCA is to modernise and simplify consumer credit regulation and to facilitate innovation in credit products, with the end goal being to help grow the UK economy. Given the length of time these reforms are expected to take, this initial consultation is a high-level view of the principles that will guide the government in these reforms to help ensure these objectives are delivered.
The principles underpinning CCA reform are that reform should be:
- Proportionate – reform will ensure that levels of consumer protection will be appropriate, whilst balancing the need to ensure that the reform places proportionate burdens on business.
- Aligned – reform will align with the implementation of the FRF, will complement and support the Consumer Duty requirements, and will ensure consumer credit regulation broadly aligns with the style and substance of current financial services regulation.
- Forward-looking – reform will be mindful that changes made should be adaptable to future ways of delivering credit and consumer hire to consumers and to the needs of consumers and businesses as they may change in the future.
- Deliverable – reform will be designed to be deliverable for the financial services regulators and industry. There is acknowledgement that significant change may be required to internal processes and adequate time will be given for changes to take effect.
- Simplified – creation of a regulatory regime that simplifies and modernises ambiguous technical terms used in the CCA to make it clear what protections there are and to make it easier for firms to communicate these protections and comply with requirements.
The consultation also details the approach of the government to a number of specific issues, asking for stakeholders to submit views on (amongst others) the following specific issues:
Definitions
The government notes that some consumer credit concepts are not defined and have required case law for clarity. Views are sought on whether there are any concepts that should be defined moving forward.
Scope of CCA
The consultation highlights that that the CCA only covered consumer credit in certain circumstances, and asks for views on whether the business lending scope of the CCA should be widened.
Information requirements
The government is seeking views on whether the information requirements under the CCA could be replaced by FCA rules and whether there are any additional factors that should be considered. The government is also seeking views on whether the implementation of the Consumer Duty reduces the need for prescriptive information requirements.
Rights and protections
Views are sought on whether there are any areas where consumer protection legislation, outside of the CCA, makes for appropriate levels of protections and replicates the provisions of the CCA. Views are also sought on other consumer protection outside of the CCA, and if there are any rights and protection provisions which should not be moved to FCA rules.
Sanctions
The consultation notes that the CCA includes strict sanctions for non-compliance with the duties imposed on creditors. These sanctions often fall into one of the following: unenforceability sanctions; criminal offences; disentitlement to interest and default sums sanctions; and breach of statutory duty.
The sanctions of unenforceability and disentitlement are self-policing in nature and apply automatically without the FCA or consumer taking any action. This has resulted in instances of unenforceability and disentitlement for minor breaches of information requirements where there has been no evidence of consumer harm. As a result, the government is seeking views on whether it should consider the proportionality of sanctions and ensuring that they are relative to the consumer harm caused.
The government is also seeking views as to whether reform is an opportunity to transfer some of consumer remedies into the FCA toolkit.
Next steps and final thoughts
The deadline for comments on the consultation is 17 March 2023. After this, the government will publish its findings and is expected to consult on more detailed policy proposals.
While the consultation doesn't provide a detailed take on the government's approach to reform of the CCA, it is nevertheless welcomed by the industry as being an opportunity to reset the dialogue on consumer credit between the government and FCA. The mood for reform seems positive, and stakeholders should take the various opportunities to input into this major reform.
The awkwardness of the CCA, and the complexity of the task of transferring the remaining CCA provisions to the FCA Handbook, mean that it will take quite some time before we have a modernised consumer credit regime in the UK, but it is encouraging to see the government (re-)grasp the nettle.
If you have any queries on the CCA reforms, please get in touch with Bruce Stephen, Kimberley Ryder-Forman or Lindsay Lee.
