Consumer Credit Overhaul Confirmed

As part of its programme of regulatory overhaul, the Government has issued a consultation on reforming the UK consumer credit regime.

The consultation was published on the same day that the Government announced a package of reforms for the existing financial regulatory framework and that the FCA issued its approach to the implementation of the Future Regulatory Framework. These reforms, among other things, empower the Treasury and financial services regulators to design the post-Brexit regulatory landscape in the UK.

However, scrutiny of the consumer credit regime has been ongoing. The publication of the consultation follows an announcement in June 2022, signalling the Government's intent for major amendments to the current consumer credit framework. It also follows the Government's June 2022 response to its October 2021 consultation on the regulation of Buy-Now-Pay-Later (BNPL). In that response, the Government confirmed the extension of the regulatory perimeter to capture previously exempt consumer finance arrangements, including BNPL and other forms of short-term interest-free credit (STIFC) where offered by third party lenders (see our briefing here). Further, the consultation builds on the findings in the Woolard review (see our briefing here), which looked into improving the regulatory framework in relation to unsecured lending, and the FCA's report on its review of retained provisions of the CCA (the RPR Report). The consultation has also been published against the backdrop of the looming regulatory overhaul that is the FCA's Consumer Duty (see our briefing here).

The consultation seeks views on strategic direction, in particular as to whether and how key consumer protections, such as information requirements and sanctions, remain fit for purpose.

Background

The Consumer Credit Act 1974 (CCA) governs the regulation surrounding billions of credit card purchases, personal loans and consumer hire agreements made by UK consumers every year. The Government has, over the years, transferred parts of the CCA out of legislation and into the FCA regulatory framework. The Government comments that the consumer credit landscape has changed considerably since the CCA was enacted: consumers' interaction with lenders has shifted to digital platforms, new credit products have emerged and the regime has become increasingly fragmented and complex.

In particular, the Government discusses how the manner in which the UK implemented the EU Consumer Credit Directive (CCD) has contributed to this complexity. As a maximum harmonisation directive, the CCD did not allow the Government to introduce domestic legislation/regulation that diverged from the CCD's highly prescriptive requirements (e.g. the Standard European Consumer Credit Information). CCD requirements were layered over an existing framework in the CCA and, later, in part transferred to FCA rules.

The Government considers that Brexit has given it a chance to align consumer credit regulation with both modern and domestic realities. The consultation outlines the following principles underpinning reform: proportionate, aligned, forward-looking, deliverable and simplified. The Government also comments that reform provides an opportunity to make the consumer credit regulatory regime more inclusive. In short, the Government is hoping that the new framework will provide appropriate levels of consumer protection aligned with the Future Regulatory Framework and the FCA's Consumer Duty requirements.

Definitions within the CCA

The Government refers to some consumer credit concepts, carried across to the FCA handbook (e.g. the meaning of "credit" and "enforceable"), which are not defined and have required case law for clarity. Views are sought on whether there are any concepts that are not defined in the CCA, but which could be defined in FCA rules.

Scope

Views are also sought on whether the business lending scope of the CCA should be amended. The consultation points out that lending for business purposes under £25,000 is often avoided because it does not benefit from current exemptions under the consumer credit regime.

Information requirements

Here, the Government is looking at whether current information requirements are fit for purpose and reflect technological change. The key will be to find the correct balance between giving firms, on the one hand, the flexibility to meet customer needs and, on the other hand, certainty as to disclosure standards.

The CCA requires lenders to provide consumers with specific information before and after a consumer credit agreement is entered into. Secondary legislation made under the CCA sets out the detail of the information requirements: these are highly prescriptive and non-compliance can have severe consequences. Further, the rigid process for amending legislation prevents the consumer credit regime from keeping pace with innovation, new conduct issues and emerging risks and harm. Finally, prescribed requirements might not always be appropriate based on customers' circumstances. Both the RPR Report and the Government have therefore concluded that there is a clear rationale to move information requirement provisions from the CCA into the remit of FCA rules.

Substituting the CCA information requirements with FCA rules would, the consultation also argues, streamline the regime by removing duplicative requirements and ensuring consistency. As an example of duplication, pre-contractual disclosures include both the pre-contract credit information under section 55 CCA and the requirement for adequate explanations under the FCA's Consumer Credit sourcebook (CONC). If the pre-contract disclosure requirements are moved entirely to FCA rules, a potential approach would be to require firms to issue one document tailored to the individual circumstances of the customer and the product at hand. An example of inconsistency includes the CCA approach to time limits and triggers for post-contractual notices, which varies according to credit type. These factors increase complexity and costs for lending operations.

The Government considers that a rules-based approach would bring consumer finance regulation in line with the Consumer Duty, which focusses on outcomes rather than prescription. In the process of making such rules, the FCA would likely need to conduct consumer research and testing (e.g. on the mode of delivery, timeliness and the form and content of the information requirements) to ensure these are appropriate.

The Government is seeking views on:

• whether the information requirements could be replaced by FCA rules without adversely affecting the appropriate degree of consumer protection and whether there are any additional factors that should be considered given the context changes since the RPR Report's publication in 2019;
• the circumstances under which it is important for the form, content and timing of pre-contractual and post-contractual information provided to consumers to be mandated and prescribed;
• whether the implementation of aspects of the Consumer Duty providing that consumers should be given the information they need, at the right time, and presented in a way they can understand it, reduces the need for prescriptive information requirements; and
• how consumer information can be delivered on devices in a way that sufficiently engages consumers, whilst ensuring they receive all necessary information, given the increased use of smartphones.

Rights and protections

Currently, the CCA provides consumers with important rights and protections at both the pre-contractual and post-contractual stages of an agreement. The consultation considers there is a good case for amending the FCA’s rulemaking power under FSMA or exploring whether another mechanism could be used to enable FCA rules to replicate current CCA rights and protections.

The consultation outlines certain valued consumer rights and protections under the CCA that should be retained or replicated in a new regulatory regime: section 75 (connected lender liability); section 56 (deemed agency); section 94 (the right to complete payments ahead of time); and section 93 (interest not to be increased on default). In addition, specific rights and protections have been identified as warranting more detailed questions, including: sections 129-30 (time orders); voluntary terminations (sections 99 and 100); and the unfair relationship provisions (section 140A to 140C).

The consultation also outlines other non-CCA consumer focused protections that have been brought in separately to the CCA and that it argues might duplicate some of the rights and protections provided in the CCA. These include: seeking redress through the Financial Ombudsman Service; challenging unfair contract terms under the Consumer Rights Act 2015; seeking redress through the courts under the Consumer Protection from Unfair Trading Regulations 2008; taking a private right of action against a firm under section 138D FSMA; and the Consumer Duty, once fully implemented.

It is also noted that, as an Act of Parliament, the CCA contains many powers that are not afforded to the FCA. These include:

• directly giving consumers specific rights and entitlements in their contractual relationships with firms, and making any contract terms inconsistent with these void;
• imposing obligations on consumers or non-authorised persons, including in relation to non-financial linked transactions;
• making a firm’s exercise of private contractual rights invalid where CCA standards are not met;
• governing the passing of title in goods in certain circumstances;
• creating a statutory joint and several liability for misrepresentations or breaches of contract in certain circumstances; and
• providing for judicial control and powers in relation to agreements and for the onus of proof in certain court proceedings.

Views are sought on whether:

• there any areas where consumer protection legislation, rules and/or guidance, outside of the CCA, makes for appropriate levels of consumer protections and mirrors/replicates the effects of the provisions in the CCA;
• other consumer protection legislation, rules and/or guidance, outside of the CCA, fall short of replicating the effect of the provisions in the CCA (and if so, how significant are these gaps);
• it is possible to amend the FCA’s FSMA rulemaking power to enable FCA rules to replicate the effect of rights and protections currently in the CCA and associated risks and benefits;
• there any rights and protections provisions which should not be moved to FCA rules and should remain in legislation;
• time orders provide additional protections to FCA’s rules around the fair treatment of customers in arrears (CONC 7) and the Tailored Support Guidance (TSG) and whether the existence of this right changes firm behaviour and improves consumer outcomes; and
• the FSMA and FOS regimes make the unfair relationship provisions unnecessary.

Sanctions

The Government notes the CCA contains strict sanctions for non-compliance with the duties it imposes on lenders. Broadly, these sanctions can be categorised as follows: unenforceability sanctions; criminal offences; disentitlement to interest and default sums sanctions; and breach of statutory duty. The consultation argues that the original policy intention for sanctions in the CCA was for them to be penal and act as a deterrent. It points to instances of unenforceability and disentitlement for minor breaches of information requirements where there has been no evidence of consumer harm.

The Government proposes to concentrate sanctions in the FCA toolkit. As part of this process, it will explore enabling the FCA to apply unenforceability as a sanction for breach of FCA rules.

Views are sought on whether:

• the Government should consider the proportionality of sanctions and ensure that they are relative to the consumer harm caused/potentially caused;
• there are certain types of breaches of CCA rules that sanctions should attach themselves to and why;
• the CCA provisions giving rise to a criminal offence are valuable; and
• there are any provisions that are outdated because the practices they pertain to are not used anymore.

Consumer hire and small agreements

Consumer hire and consumer credit are both regulated under the CCA, but consumer hire firms are subject to lower standards and consumers of hire products benefit from lesser rights/protections. The Government queries whether this is the right approach, given the growing popularity and prevalence of hire agreements.

Certain parts of the CCA do not apply to "small agreements". This is defined in section 17 of the CCA as a regulated consumer credit agreement for credit not exceeding £50, other than a hire-purchase or conditional sale agreement. In the response to its consultation on BNPL, the Government set out its intention to disapply section 17 of the CCA for BNPL agreements when these are brought into regulation (owing to the fact that BNPL is frequently used for agreements below £50). The Government notes, however, that disapplying section 17 only for BNPL would result in unequal treatment of BNPL and other consumer finance providers. It is therefore proposed that section 17 is reviewed across all regulated agreements.

Views are sought on:

• the merits in increasing the standards of conduct for consumer hire agreements to make them comparable to those for consumer credit; and
• whether the section 17 provisions which enable exemptions from specific elements of the CCA and CONC should continue to exist.

Next steps

The deadline for comment is 17 March 2023. The Government is expected to consult on more detailed policy proposals. The FCA will consult on its approach to any new rules in due course. Implementation of the final approach will likely require primary legislation, which will be brought forward when parliamentary time allows.