“Successive amendments have attempted to update the CCA since its original enactment but, perhaps unsurprisingly, it is struggling to keep pace with the modern world. The time is now right to be as ambitious as our predecessors in 1974 and fundamentally reform the approach to the regulation of consumer credit in the UK.”
(Andrew Griffith MP, Economic Secretary to the Treasury)
Summary
Given the widespread support demonstrated by responses to its December 2022 consultation, the government confirms in its consultation response that it is planning to move forward with ‘an ambitious overhaul of the CCA’. For more on the consultation - including the background to the CCA reform initiative - take a look at our Engage article ‘UK Consumer Credit Act 1974: HM Treasury takes first step towards ‘ambitious long-term reform’’.
The government will now be focusing on policy development to produce more detailed proposals, with a view to publishing a second stage consultation in 2024. As ever, the devil will be in the detail so firms that currently offer or are considering developing consumer credit products need to be ready to contribute their thoughts as the new regime proposals start to take shape.
Next steps
Stakeholder engagement before a second stage consultation
Before publication of the next consultation in 2024, the government will engage further with stakeholders to inform its proposals, both through bilateral meetings and broader roundtables. The government plans to reach out to a range of interested parties on the overall design of the new regime.
In particular, it is keen to take time to engage widely on cross-cutting issues (eg the degree to which regulation should be outcomes based, an approach to sanctions, and the extent to which provisions should be removed from legislation) with the aim of developing a clear articulation of the desired end state for consumer credit regulation.
The government will be conducting an Impact Assessment of any proposals, in line with its statutory obligations. It would therefore like to understand from stakeholders what data they may be able to share to inform such analysis.
The government reiterates that, due to its scale and complexity, CCA reform will take several years to deliver. It’s likely to require primary legislation, a detailed rulemaking process by the FCA (supported by a Cost Benefit Analysis), and appropriate transitional periods to allow industry to prepare and adapt to new rules. Given this it is questionable what can be achieved ahead of the next general election (which must be held before 23 January 2025).
Looking ahead to implementation: a phased approach?
It is difficult at this early stage to provide a specific implementation timeline, but the government will aim to provide more detail in due course.
The government is keen to hear representations from stakeholders on the desirability and deliverability of a phased approach to implementation. For example, it could look to make changes to certain parts of the regime first (eg information requirements and associated sanctions), with reform of the remaining aspects of the regime following at a later date – subject to any issues arising from the interconnectedness of the CCA and the possibility of higher transitional costs to industry.
What about HM Treasury’s work on Buy-Now Pay-Later (BNPL) regulation?
HMT’s work on its proposals for bringing BNPL within the consumer credit regime continues, with a February 2023 consultation on draft legislation which closed on 11 April (see our article 'Buy-Now Pay-Later: UK government consults on draft legislation'). The government will now be considering stakeholder feedback, including any necessary changes to the draft legislation. Its consultation response will set out the anticipated key milestones for regulation. The government will then lay legislation when Parliamentary time allows, with the ambition that this will be during 2023. The FCA will subsequently consult on the details of the regime. It is still expected that BNPL will be brought into scope before the broader changes to the regime.
Reform objectives and principles
- The majority of consultees supported the government’s intention to fundamentally rethink the CCA.
- Consultees were generally supportive of the objective to align consumer credit regulation with modern financial services regulation by removing many of the provisions in the CCA and recasting them in FCA rules. However, there were different views on how the government should look to achieve this, focused on the tensions between:
- FCA enforcement vs a ‘self-policing’ regime;
- Prescription vs outcomes; and
- Legislation vs rules.
- On the last point above, as consulted on the government will develop proposals that move the majority of the CCA into the Financial Services and Markets Act 2000 (FSMA) model. This will involve repealing much of the CCA and recasting it (including much of the related secondary legislation) in the FCA Handbook. However, there is recognition that there may be specific aspects of consumer credit regulation that may warrant legislative-based provisions. The government will use the five principles set out in the consultation (‘proportionate’, ‘aligned’, ‘forward-looking’, ‘deliverable’ and ‘simplified’) as a guide when making decisions between the FCA Handbook or legislation.
- Some stakeholders (in particular, consumer groups and charities) thought that an additional overarching consumer protection principle should be added. In its response, the government has provided reassurance that consumer protection is ‘central to this reform’ and is therefore already part of the principles.
- On net zero, the government will continue to consider how its regulatory approach can support the provision of finance for renewable energy solutions and contribute to its net zero goals, while ensuring appropriate consumer protection.
Approach to reform of CCA provisions by category
The consultation categorised the CCA provisions into five main areas and sought stakeholder views as to how the government’s approach to reform could apply to them. The government has not yet come to any firm conclusions on how these areas will be reformed, but will consider responses further as part of policy work to create detailed proposals and will carry out further stakeholder engagement (see ‘Next steps’ above). Points of interest from the consultation response include:
Scope
- Business lending: Industry stakeholders generally supported reducing the scope of regulation of SME business lending or creating a separate set of requirements and protections for small business lending in the FCA Handbook.
- Consumer hire: There were a limited number of responses to the question of whether, given the increased prevalence of consumer hire, particularly in the motor industry, the regulation of consumer hire ought to change. There were different views on whether the risk to consumers from hire services is equivalent to that from credit products. Some consultees argued that the scope of what is included as consumer hire should be reviewed because of the increasing prevalence of subscription services which operate similarly to regulated consumer hire. The government is keen to work with those who have a particular interest in this area.
- Small agreements: On the basis of a limited number of responses on whether the regulation of small agreements should be reconsidered, most responses supported a proportionate approach to the regulation of small-amount credit. Some consumer groups made the point that vulnerable consumers use small-amount credit and that such credit can play a significant part in managing their finances and therefore the exemption should be removed to ensure higher standards of protection.
Definitions
- Consultees argued that changes to definitions would help to achieve a more future-proofed regime that can better facilitate innovation and adapt to emerging products. Definitions that were raised by consultees particularly frequently included:
- Fixed Sum vs Running Account – According to consultees, the definitions prevent product innovation and many new products, such as BNPL involving frequent online purchases, do not fit neatly into either category;
- Multiple agreements - Many stakeholders argued section 18 CCA is no longer needed;
- Modifying agreements – Some thought that section 82 CCA is burdensome and might restrict the scope of arrangements lenders could offer to consumers in financial difficulties.
- It was also noted in the consultees’ responses that some definitions, such as those relating to credit tokens, have become inaccurate as a result of technological developments.
Information requirements
- There was general support for moving information requirements into FCA rules, although some consumer groups were of the opinion that this was only on the basis that the sanctions regime continued to operate in a similar manner.
- Particular requirements that consultees think should be updated in the process of transferring the requirements include Pre-Contractual Credit Information (PCCI), Notices of Sums in Arrears (NOSIAs) and Default Notices.
- Industry groups broadly supported an information requirements regime that specifies what kind of information has to be provided and when. However, they were mostly opposed to requirements that dictate the form of the information, particularly in the context of changing communication channels. Some industry and consumer representative consultees argued that a reformed regime could take advantage of the capacity of modern communication channels to engage people.
- On the extent to which the Consumer Understanding outcome under the Consumer Duty could replace the need for prescriptive information requirements, some did not believe the Duty could fully replace the need for more detailed rules on information requirements or would like a chance to evaluate the effect of the Duty first. Many noted that a reduction in the level of prescription would be in alignment with moving more towards an outcomes-focused regime alongside the Consumer Duty.
Rights and protections
- Most consultees recognised that, given its specific focus on consumer credit, the CCA contains rights and protections that are not mirrored in other legislation. It was also highlighted that CCA rights and protections provide court-based rights for which the effect of moving them from the CCA would require more detailed legal analysis.
- A number of industry respondents argued that the Consumer Duty could replace the need for some rights and protections, because firms who do not provide appropriate customer support could be subject to FCA enforcement action. The government is keen to monitor the implementation of the Consumer Duty and understand whether and how it could provide appropriate rights and protections in this area.
- A number of consultees argued it would be impossible for the FCA to fully replicate CCA rights and protections in its Handbook (in particular, section 75) and that they would therefore have to remain in legislation. Concern was also expressed by some industry stakeholders that moving certain provisions to FCA rules could mean the loss of case law that has added clarity and helped firms’ interpretation of the CCA, and that the government should bear this in mind when developing its proposals.
- On some specific provisions:
- Section 75: While recognised as important, many consultees believe this provision could be modernised. Points raised included a lack of clarity on whether it applies to transactions where the debtor-creditor-supplier chain has broken, and the view that the consumer should only be able to pursue the lender where they have first been unable to do so against the supplier.
- Time orders (sections 129-130): The majority of respondents made the point that time orders are rarely used. The FCA’s forbearance rules and the potential impact of the Consumer Duty were mentioned as more appropriate mechanisms to protect borrowers in financial difficulty.
- Voluntary termination (sections 99-100): Some industry stakeholders argued that the widespread use of voluntary termination (eg in the motor finance context) has led to higher prices for consumers and that the provision should be revisited.
- Unfair relationships (section 140A-140C): Industry stakeholders believe the drafting of the provision is unclear, difficult to interpret, and gives the court wide discretion that is difficult to predict. Their view is that the provision should at least be redrafted to improve its operability, although many went further and argued that the strong protection provided by the FOS means section 140A is no longer needed.
Sanctions
- Unenforceability is seen by many respondents as one of the main problems with the CCA. Some respondents provided data on the costs associated with having to provide redress for minor and technical breaches. They think it should not be replicated in FCA rules, believing that the FCA’s enforcement powers and other routes to redress (eg via the FOS) provide adequate sanction and deterrence. Some industry stakeholders were open to the idea of replicating unenforceability in FCA rules, provided that it only applies to a few core requirements which are subject to a clear standard of compliance (as opposed to outcomes-based requirements) where there is a serious risk of actual consumer harm.
- Some stakeholders were of the view that, if unenforceability sanctions were to be applied to FCA rules, then courts should remain responsible for providing enforcement orders as the FCA is not resourced to carry out this role and the courts are more suitable.
- On the CCA provisions that give rise to criminal offences, some consultees noted the FCA’s strong enforcement powers and the fact that the criminal offences have never been used and are therefore unnecessary. Others were supportive on the basis that they may provide a strong deterrent, in particular the criminal sanctions attaching to section 50 (circulars to minors) to deter firms from targeting under 18s.
Financial inclusion and equality impact assessment
The government is keen to use the CCA reform process to make the consumer credit regulatory regime more inclusive and it asked a number of questions on this subject in the consultation. Stakeholders’ feedback included responses on the following areas:
- Financial literacy and numeracy: There was general agreement that there is room for improvement on the presentation of numerical information relating to consumer credit products, with some making the point that a less prescriptive approach to information requirements could allow numeric information to be presented in alternative ways, eg pictorially. Some stakeholders noted the role of the Consumer Duty in helping to ensure firms consider their customers’ individual circumstances.
- Financial inclusion and mental health: Again, many consultees identified the prescriptiveness of the CCA information requirements as a key concern, eg NOSIAs and Default Notices can be overwhelming and intimidating for customers.
- Islamic finance: Respondents noted that the CCA inhibits the fuller range of credit products that firms might want to offer to customers who are looking for Sharia-compliant offerings. The government is planning to explore this area in more detail so that, to the furthest extent possible, Sharia-compliant agreements can be accommodated within the new regime.
- Public sector equality duty: Issues raised by respondents here included that:
- Many CCA requirements have historically been based on an assumption that consumers are able-bodied, eg the existing regime requires customers to be able to see the prominence of certain information and to provide a signature in a box;
- Data has shown that a disproportionate number of recipients of debt advice are women;
- The government should consider how ethnicity interacts with financial inclusion; and
- Concerns relating to how algorithmic approaches to credit provision may be leading to discrimination.
The government plans to engage with stakeholders in due course to explore many of the above issues further.
Developments in the EU: Consumer Credit Directive II
Those consumer credit firms with a European presence will be interested to know that work on the proposed Directive on consumer credits (CCD II) to revise and replace the current Consumer Credit Directive (2008/48/EC) continues apace in the EU. The proposal is subject to the EU’s ordinary legislative procedure.
In May 2023 the European Parliament's Committee on Internal Market and Consumer Protection (IMCO) published the text of CCD II (dated 27 April 2023), on which provisional political agreement by the European Parliament and the Council of the EU has been reached.
The European Parliament is expected to adopt the proposed CCD II at first reading when it is put to the vote in plenary in September 2023. Following that, the Council of the EU will adopt it and it will then be published in the Official Journal of the EU and enter into force. Member states will then have 24 months in which to transpose the Directive’s provisions into laws, regulations and administrative provisions. Those measures will have to be applied twelve months from the transposition date.
