Where next for UK green consumer finance?

The potential of green finance is clear, but the growth of the sector is hampered by a range of practical and regulatory challenges. What solutions are the industry leaning towards, and what measures might the government take to boost green finance?

Property-linked finance

This would involve making the finance "sticky" to the property which benefits from the upgrade, known as property-linked financing. The Green Finance Institute considers this reform has the potential to unlock up to £70 billion of investment for UK home energy efficiency improvements.

There are a number of ways of achieving this outcome, almost certainly requiring changes to legislation to implement the proposals effectively.

However it is achieved legally, the general principle of property-linked finance is that the person who owns and lives at the property at any given time pays for the energy efficient upgrades, so it takes effect like some sort of service charge. This would mean that the owner of the property can sell it without retaining any liability to pay for the upgrades – the new property owner would then continue to pay the charge until the arrangement comes to an end.

Property-linked finance would clear up the question of whether making "green" home improvements is a worthwhile investment in the property for one specific owner, and alleviate any concern a homeowner may have around continuing to pay for the improvements if they wish to move in the short term.

However, this option has the potential to create other issues, such as devaluing homes that are sold with the charge attached to them and creating an expectation that the purchase price of the property is adjusted down to take into account the attached charge in relation to the green upgrades. This might mean that the seller ultimately ends up paying for the home improvements by accepting less, eating into any equity on sale.

Moreover, well-informed borrowers may still opt for using consumer credit, unless a similar level of protection could be created for property linked finance.

Consumer credit reform

Reform of the Consumer Credit Act 1974 (CCA) is already in progress, although likely to take some years to complete. Building a regime which either exempts green finance or carves out a separate set of rules for it to encourage lenders to offer finance in this space has not been taken off the table.

If exemptions for offering green finance are not introduced, lenders may have some success in campaigning for changes to complex documentary requirements and a lighter touch regime. However, consumer groups are likely to lobby extremely hard to retain all consumer protections inherent in the CCA, such as section 56 and 75 protection.

Industry-led solutions

Any legislative reform which removes consumer protection may need to be supplemented by industry-led protections in the space of green finance.

Different alternatives are already being floated, such as installers signing up to mandatory quality assurance schemes, and the possibility of an insurance product paid for by industry to cover the possibility of claims.

Indeed, such schemes may end up being operated in addition to CCA consumer protections, which would help protect lenders from section 56 and 75 claims by trying to stop misrepresentations or breaches of contract before they occur. Any type of policy funded by industry would encourage players within it, who pay the premium, to provide the best possible service in order to keep those premiums at a minimum.

These ideas are likely to be explored further as the quid-pro-quo for removing statutory consumer protections in the area of green finance.

Government initiatives

The government has the ability to introduce a host of other incentives to boost green initiatives.

These could include, but are unlikely to be limited to, granting funding to get the ball rolling, and potential tax breaks for those who are upgrading their homes – similarly, electric vehicles are already offered to employees under some salary sacrifice schemes.

The government may also impose minimum standards to push people to act, such as mandating minimum energy efficiency standards for owner-occupied homes, particularly as the net zero strategy targets set by the previous government come nearer.

Osborne Clarke comment

The field is currently wide open in terms of solutions to the issues holding back the green finance market.

Firms interested in this space will be keeping a close eye on the progress of the CCA overhaul project, as well as potential industry-led initiatives. As potential reforms develop, there is likely to be scope to engage in further consultations as well as dialogue with the government, regulators and industry. 

This Insight is the third in a three-part series looking at the UK green finance market from a financial services perspective. The series opened with a look at the definition of green finance and why it's needed followed by considering the practical issues facing green finance, including regulatory blockers.

If you would like to discuss any of the issues raised in this series, please contact one of our experts below.