UK develops thinking on consumer credit law reform but manages expectations

The government, following the announcement in June that it intends to reform the Consumer Credit Act 1974 (CCA), has published (9 December 2022) its much-anticipated first consultation on the changes. A deadline of 17 March 2023 has been given for responses to the 30 questions posed, with a further consultation to follow on more detailed policy proposals.  

The changes will be implemented via primary legislation, which the government says will be brought forward "when parliamentary time allows". The desired outcome is for the regime to be predominantly moved from legislation into Financial Conduct Authority (FCA) Handbook rules and guidance, on the basis that this will make it "more agile".  

However, the government does not envision simply copying the existing CCA provisions into FCA rules, but intends to recast them entirely, taking the opportunity to update and modernise the law. It expects the result to be FCA rules, guidance and principles providing effective and high levels of protection that achieve similar ends to existing legislation, but in a way that is more flexible, adaptable and future-proof.  There will also be a need for the FCA to consult on its approach to new rules, and on the new rules themselves, before they can be implemented.

Now is the time for reform

The government has observed that the existing regulatory landscape – which is made up of the CCA, subordinate legislation and FCA rules, and incorporates historic requirements under the EU Consumer Credit Directive – has become increasingly fragmented. It is "too complex and incoherent", "costly for firms and difficult for consumers to understand", and it "contains overlap that restricts optimal outcomes for consumers and business".

The FCA's 2019 Retained Provisions Report on whether the repeal of CCA provisions would adversely affect the appropriate degree of protection for consumers did not consider the impact of other forms of consumer protection that will or could be introduced, such as the Consumer Duty and changes to the FCA's rule-making powers, nor did it consider the opportunities made available by leaving the EU.

The Consumer Duty does not fully replicate all aspects of consumer protection found in the CCA, which provides some protection for borrowers under unregulated products, criminal and redress sanctions, and unenforceability. However, the introduction of the Consumer Duty does mean that the context in which the CCA protections were originally written has changed.

What will reform look like?

The government is open to wholesale reform, including looking at whether the expansion of the FCA's rule-making powers is possible or desirable to enable the transfer of provisions out of the CCA. In this context, it is mindful of the Edinburgh reforms, which aim to empower financial regulators while enhancing their accountability, and the introduction of the Consumer Duty principle, which raises expectations for the standard of care to be provided to customers by regulated firms.  

The government's ambitions for the reform are to:

• Move the majority of the CCA and subordinate legislation into FCA rules.
• Modernise regulation so that it more closely follows approaches in other areas of financial services regulation.
• Simplify both credit and hire regulation, and make it more focussed.
• Facilitate innovation and new market entry.

In executing on these ambitions, the government has proposed that reform be underpinned by the following principles:

• Proportionate (in terms of consumer protection versus business burden).
• Aligned (with the style and substance of current financial services regulation and the Consumer Duty).
• Forward looking (and adaptable to future ways of delivering credit).
• Deliverable (for both industry and regulators).
• Simplified (particularly some currently technical and ambiguous concepts).

Opportunities to influence reform

The government covers a lot of ground in the consultation, including how reform could help the UK achieve its net-zero targets, how better to cater for Sharia-compliant loans, how consumer information can be best delivered to consumers on mobile devices, and how the CCA currently interacts with other consumer protection legislation. 

However, areas that are likely to be of interest for all lenders (including currently exempt lenders who will be brought into the regime as a result of regulatory reform) are likely to be:

• Customer information. The pros and cons of giving lenders more flexibility in terms of the form, content and timing of pre-contractual and post-contractual information provided to consumers. This discussion will no doubt result in many calls for removal of the requirement to provide the standard form pre-contract consumer credit information.
• Going digital. How consumer information can be best delivered to (and contracts signed with) consumers on mobile devices. 
• Consumer Duty. How the Consumer Duty interacts with the rights and protections provided to consumers in the specific consumer credit regulatory regime (with impenetrable mandatory wording in notices already being questioned in this regard).
• Unenforceability. Whether the government should give the FCA power to render agreements unenforceable when certain rules are breached, instead of having that power rest with the courts.
• Sanctions. Whether there is a place for rule breaches resulting in borrowers having no liability to pay interest or default fees attributable to the period of non-compliance and, if so, what kinds of breaches should be caught.
• Criminal offences. The value of any particular breaches constituting a criminal offence.
• Unfair relationships. Whether the existing regulatory regime under the Financial Services and Markets Act 2000 and the protections afforded under the jurisdiction of the Financial Ombudsman Service mean that the unfair relationship provisions are now unnecessary.

Osborne Clarke comment

The importance of practical input into the consultation process from stakeholders with an understanding of the holistic impact of regulation in these areas cannot be underestimated. Please do contact us if you'd like to discuss these or any other issues raised in the consultation further.