Consumer credit reform in the UK: where now?

The UK government's consultation on reform of the Consumer Credit Act 1974 (CCA) closed on 17 March 2023, following the announcement in June last year that it intended to pursue much-anticipated changes to the 50-year-old regime.  

The government's plans are ambitious and the consultation it opened in December 2022 asked a broad set of questions to develop its thinking on consumer credit law reform. Why does the CCA need to be reformed, what are the different interest groups and the challenges the government faces, and what happens next? 

Background to reform

The CCA was conceived after a comprehensive study of the consumer credit market by a committee (the Crowther Committee), which was appointed in 1968 and reported in 1971. The environment in those days was, of course, very different. Credit cards as a product were in their infancy, the UK was not yet part of the EEC, and digital channels had not been invented. At the time, there were real concerns around "doorstep mis-selling" of loans by agents and canvassers, and there was no effective machinery (such as a strong regulator) for enforcing compliance.  

Some of the provisions that remain in the CCA can be directly linked back to risks that were of concern 50 years ago. Not only are today's consumer risks very different, there is now a full framework of consumer protection legislation in place (much of it a legacy of the UK's EU membership), we have a highly effective regulator in the Financial Conduct Authority (FCA) and a well-established financial ombudsman service.  

Different interest groups

Consumers who use any kind of unsecured lending product will be affected by changes to the CCA regime, and consumer groups will be well represented in the responses to the consultation received by the government.  The firms whose products and services are governed by the CCA are many and varied, and they will also be well-represented. They include everyone from banks and mainstream lenders to pawn brokers; and from motor vehicle, plant and machinery dealers to buy now pay later lenders.

When it comes to the CCA, views tend to be strongly held. Consumer groups are adamant that they should not lose certain key statutory rights and protections that are contained in the CCA. Well-established lenders strongly believe that small fintech innovators should have to comply with as much of a regulatory compliance burden as they face. And the FCA is concerned that it doesn't have the bandwidth to "police" such a massive and disparate sector.  

Reform prerequisites

The government will have to navigate these competing interests with its eye firmly focused on what we think are well-conceived principles that it has set out in the consultation. These are that any reform must be:

• Proportionate – it must balance the need for consumer protections with business burden.
• Aligned – it must align with the FCA's existing regulatory strategy and rules.
• Forward-looking – it must be adaptable to future ways of delivering products in the future. 
• Deliverable – it must be deliverable for the FCA and the industry.
• Simplified – it must modernise and simplify the language used in the CCA to become more accessible.

A challenging project

Since there was no strong regulator to keep the market in check in the 1970s, the CCA was designed to work on its own as a "self-governing" body of law. Detailed information requirements for finance providers ensured that consumers would receive a minimum level of information, customers were given specific rights to address perceived imbalances of power, and finance agreements were to be "unenforceable" if requirements were not complied with. In some cases, there were even criminal sanctions that applied.  

These rights and sanctions remain in place today. However, since the FCA took over regulating consumer credit from the Office of Fair Trading in April 2014, it is no longer true to say that it operates as a self-governing body of law as the FCA now has wide powers of its own to sanction non-compliant lenders and brokers.  

A political decision?

It is, of course, always much easier to give consumers new rights than to take rights away, which makes how the government proceeds with reform a highly political decision. Its challenge is that the FCA rules-based regime (which the government would like to have apply in place of the CCA) does not allow for automatic unenforceability for breach of requirements, and nor does it allow for criminal sanctions unless it specifically grants the FCA new powers. It must therefore either persuade consumer groups that the protections and remedies that can be made available under existing FCA powers are good enough or make the case for the FCA to have more powers.

In the meantime, there are policy issues in play, including that the CCA may be operating as a barrier to growth and innovation, particularly when it comes to green finance, where strong consumer rights are making the market unattractive for finance providers. Further, the CCA is interconnected with, and must be considered with, many other consumer (and other) laws. The risk of unintended consequences if reforms are not carefully tracked through to other legislation could result in harm. This requires detailed analysis and may result in other legislative regimes needing to be changed. This may mean involving other branches of government with different priorities.  

Osborne Clarke comment

Following the consultation, the government has said that it will provide a summary of responses and set out next steps. It will have lots of responses to consider, and we do not expect to hear anything before the autumn this year.  

In the longer term, in our view, what CCA reform ultimately looks like is dependent on the extent to which the government is willing to be accused of "watering down" or "removing" consumer rights where it is convinced that the balance of consumer rights and business burden can and should be altered. It is also dependent on whether it is willing to adopt an approach that enables "lighter touch" regulation for firms offering products that present lower risks of customer harm.

If the government has the courage to take both of these steps, CCA reform could have a transformative effect on the consumer and small business finance markets. If it does not, CCA reform may ultimately be an anti-climax.