Time now right for aligning consumer credit regulation with wider financial services framework

The CCA pre-dates most other financial services regulation, reflecting an older style of regulatory approach. HMT describes the current consumer credit regime as ‘fairly cumbersome and disjointed’ and not in keeping with the overall, modern approach taken in FSMA. It considers that the time is now right to further align consumer credit regulation with the wider framework for financial services, as the Future Regulatory Framework (FRF) Review outcomes are implemented (see below). However, in doing so there is recognition that the special nature  of consumer credit regulation  potentially warrants a different approach to ensure adequate consumer protection. The consultation is designed to inform decisions on the appropriate way to bring about this reform.

We have set out in detail below the approach adopted in the consultation and the key questions raised by HMT. 

Next steps

It’s still early days in the reform process, but firms that currently offer or are considering developing consumer credit products are likely to welcome the chance to contribute their thinking on issues such as finding the right balance between flexibility and prescription in information requirements and the proportionality of sanctions. The fact that the government is also grappling with the interaction with Consumer Duty should hopefully also help in avoiding regulatory overlap in the final proposals. Engagement with the government on the reform proposals will be key.

HMT intends to develop more detailed policy proposals, which it expects to put to stakeholders through a second stage consultation. Implementation of the final approach is likely to require primary legislation, which will be brought forward when parliamentary time allows. The FCA will consult on its approach to any new rules in due course. Given the scale and complexity of this work, it is expected to take a number of years.

If you would like to discuss the potential impact on your business, please contact us. Our Public Policy team are also able to help to guide you with how to engage with HMT.

Comments can be made on the consultation paper until 17 March 2023 and should be sent to  [email protected]. Responses will be shared with the FCA unless otherwise requested.

HMT is still due to consult on its proposals for bringing BNPL within the consumer credit regime – it is still expected that BNPL will be brought into scope before the broader changes to the regime which are the subject of this consultation. The consultation is expected to be published shortly.

HMT approach to reform – beyond the Retained Provisions Review and the Woolard Review

Previous consumer credit reform recommendations were contained in the FCA's final report on its review of the CCA retained provisions (RPR), published in March 2019, and the February 2021 Woolard Review report. See this previous Engage article for a recap of the RPR and Woolard. The RPR thematically categorised the retained CCA provisions as information requirements, rights and protections and sanctions. HMT has adopted the same categorisation in this consultation and Annex 1 contains a table showing the allocation of CCA provisions to the three categories (where possible). However, the RPR did not cover the following which HMT is now looking to address:

• The impacts of other forms of consumer protection that have come about since the transfer took place, such as the new Consumer Duty: The Duty is not designed to replicate the effect of CCA protections, but it does change the context for those protections eg the requirements under the Consumer Duty’s consumer understanding outcome may go some way to substitute the need for excess prescription on some CCA information requirements. By reviewing the consumer protections in the CCA through the lens of the additional Consumer Duty protections, the government can simplify the behavioural framework for firms to ensure optimal consumer outcomes.
• The opportunities made available by leaving the European Union, and therefore no longer being bound by the Consumer Credit Directive (CCD): For example, some precontractual information requirements, previously mandated in the Standard European Consumer Credit Information (SECCI), can now be modernised and updated. Likewise for CCD-derived FCA rules eg on the content of representative examples in advertising. (HMT points out that the Woolard Review report did highlight the possibilities that have become available following the UK’s exit from the EU.)
• Amendments to the FCA’s rule-making powers: The statutory requirement limited the scope of the report to considering whether provisions could be moved to FCA rules, under pre-existing FCA rule-making powers, whilst maintaining the same level of consumer protection. The current consultation considers whether the expansion of FCA rule-making powers is possible or desirable to enable the transfer of provisions out of the CCA. Since the RPR was commissioned, the government has committed to the approach coming out of the FRF Review and CCA reform will be aligned with this approach. The Financial Services and Markets Bill implements the outcomes of the FRF Review, including repealing financial services retained EU law to establish a comprehensive FSMA model of regulation where the financial services regulators will take responsibility for setting many of the direct regulatory requirements which are currently set out in retained EU law, acting within a framework set by government and Parliament.

Consumer protection: CCA provisions won’t just be replicated in FCA rules but will be recast – potentially with changes

According to the consultation, the government does not envision provisions being purely replicated in FCA rules, but recast – ‘potentially not mirroring their current composition’. This means that rules, guidance and principles in the FCA Handbook will provide effective and high levels of consumer protections that achieve similar ends to existing legislation.

There may be some provisions that it will not be desirable or possible to move to FCA rules and if this is the case they will stay in legislation, subject to any modifications or refinements considered appropriate.

As part of the reform, all provisions will be reviewed and updated where necessary.

Business benefits

Currently consumer credit and consumer hire are regulated by a complex set of legislation and FCA rules, which can make it difficult to navigate the regulatory regime. This can hamper innovation in the sector and can deter firms from entering the market. The reform will also place a greater focus on consumer outcomes and will enable firms to provide consumers with a better experience throughout the consumer credit product life cycle.

The green advantage of CCA reform

As a result of the government’s Net Zero targets and some finance providers’ concerns in this area, HMT is looking for views on how CCA reform can remove barriers that may otherwise prevent lenders from being able to offer financing for renewable energy solutions, such as electric vehicles and green home improvements.

Five principles for reform

The government has developed the following 5 principles which will underpin the CCA reform process over the coming years, and asks for views on them, including any tensions between them or relative prioritisation:

• Proportionate – when balancing consumer protection (including high protection for vulnerable customers) with burden on businesses.
• Aligned – with the FRF Review implementation and (broadly) with the style and substance of current financial services regulation, as well as complementing and supporting Consumer Duty.
• Forward-looking – to ensure the consumer credit and consumer hire regulatory landscape will remain fit for the future.
• Deliverable – for the financial services regulators and industry. There is acknowledgement that significant change may be required to internal processes and there is a commitment by the government to ensuring that adequate time is given for changes to take effect.
• Simplified – through simplification and modernisation of ambiguous technical terms used in the CCA to make it clear to consumers what protections they have and to make it easier for firms to communicate these protections and comply with requirements.

Approach to reform of CCA provisions by category

Chapter 4 of the consultation explores CCA provisions and categories of provisions to understand specific issues and set out the government’s proposed reform approach. HMT welcomes stakeholder input on the following topics:

Definitions

• There are some concepts which are now used frequently in relation to consumer credit, and have been carried across to the FCA Handbook, such as the meaning of ‘credit’ or the distinction between fixed sum and running account credit which have become uncertain or blurred with product innovation as well as other terms, such as ‘enforceable’, which are not defined and have required case law to clarify. To create a modern and simpler regulatory regime, the reform may need to consider whether certain key terms should be defined or have their existing definitions clarified.

Scope

• HMT asks whether the business lending scope of the CCA should be changed. Some stakeholders have reported that lending to businesses under £25,000 is often avoided due to the fact that business lending over £25,000 is generally not subject to CCA regulation.

Information requirements

• The government believes that there is clear rationale for moving almost all the information requirement provisions from the CCA into the remit of FCA rules (a view shared by the RPR). This would allow for quicker and more agile responses where amendments or additions are needed, eg to address emerging risks or harm, or to facilitate regulation of future innovative consumer credit products. As part of the process of developing the rules, the government expects the FCA may wish to consider the consumer journey as a whole, and to conduct consumer research and testing.
• On form and content of information, the government is aiming to find the right balance between flexibility and prescription so that customers are reliably provided with appropriate information which is also tailored to their needs and allows more informed choices. The consultation asks for views on whether the Consumer Understanding outcome under the FCA Consumer Duty (and the Duty more generally) goes some way to substituting the need for prescription in CCA information requirements. HMT makes the point that the Consumer Duty demonstrates the FCA is placing the onus on firms to think about their consumers and how they can best serve them, focusing on outcomes rather than prescription. According to HMT, prescription is sometimes beneficial, but there is an increasing role for firms to play in knowing and understanding their customers.
• HMT is also asking - given the increasing using of smartphones and other mobile devices to take out credit products - how consumer information can be delivered on devices in a way that sufficiently engages consumers whilst ensuring they receive all necessary information.
• Two illustrative examples demonstrating how repealing or amending provisions could lead to better outcomes for both firms and consumers are provided, one looking at the provision of pre-contractual information and the other highlighting some issues currently associated with the dissemination of Notices of Sums in Arrears (NOSIAs) under s.86B of the CCA.
• There is a separate question about whether there is a need to keep information requirements and the associated sanctions for non-compliance in the same place (on sanctions, see below).

Rights and protections

• The government believes there is a good case for amending the FCA’s rule making power under FSMA or exploring whether another mechanism could be used to enable FCA rules to replicate the regulatory outcome of the current CCA rights and protections.
• CCA rights and protections which are valued and often used by consumers and which may need to be retained in the new regulatory regime or their effect closely replicated in FCA rules include:
  • Section 75: Connected lender liability
  • Section 56: Deemed agency
  • Section 94: The right to complete payments ahead of time
  • Section 93: Interest not to be increased on default
• HMT points out that there are many CCA rights and protections that could not be replicated using the FCA’s current rule-making power, such as Section 75. It may also be undesirable to move some provisions, such as section 75, to FCA rules, partly because the associated case law could lose its status as binding precedent. However, as part of the review, the scope of Section 75 may be reconsidered or clarified, in which case the existing case law may no longer be relevant. In addition, HMT makes the point that the current operation of Section 75 means that this protection might not apply when the supplier uses a third-party payment processor which can break the required debtor-creditor-supplier link, creating confusion for consumers over whether or not they are protected. As a result, the government believes there is merit in clarifying how this provision should operate.
• If a decision were to be made to move many of the rights and protections to FCA rules, the FCA’s rulemaking powers would have to be extended to allow the regulator the ability to do the many other things that are currently possible under the CCA, eg directly giving consumers specific rights and entitlements in their contractual relationships with firms, and making any contract terms inconsistent with these void. HMT asks for views on the risks and benefits of making such a move into the FCA rules, and whether there any rights and protections provisions which respondents feel should remain in legislation.
• While there are a large number of rights and protections in the CCA regulatory regime, there are a number of other consumer focused protections that have been brought in separately, eg FOS redress, challenging unfair contract terms under the Consumer Rights Act 2015, redress through the courts under the Consumer Protection from Unfair Trading Regulations 2008, private right of action under section 138D FSMA. The government also expects the Consumer Duty to provide valuable protections to consumers. HMT asks for examples of where these non-CCA consumer focused protections might duplicate some of the rights and protections provided in the CCA, and if not where the gaps exist. Again, there is also a question on the Consumer Duty/Consumer Support outcome and how this interacts with the CCA rights and protections.
• Three specific areas of rights and protections under the CCA have been identified as worthy of more detailed questions as part of the consultation because they are well known rights and protections which stakeholders have raised differing perspectives about:
  • Time orders (sections 129 - 130): The government is not aware that time orders are commonly applied for. As firms are also required to comply with the FCA’s rules around the fair treatment of customers in arrears (CONC 7) and the Tailored Support Guidance (TSG), HMT would like to know to what extent time orders provide additional protections to these rules and guidance.
  • Right to voluntary terminations (Sections 99 and 100): The motor finance market, where voluntary termination is most frequently used, has changed since these provisions were introduced and there may be instances where customers use the right to voluntary termination to move from one agreement to another, rather than the original intention of helping them when in financial difficulty, or to address the economic imbalance that might arise between the value and depreciation of goods and the sums the customer had to pay. Some industry stakeholders argue that its increasing use, including in cases where customers are not in financial difficulty, affects the prices and rates provided to consumers. The government will consider whether the right to voluntary termination should be limited to those cases where there is an existing or potential situation of financial difficulty if the agreement were to continue and whether the protection it affords is appropriate or should be refined. It is asking for views on this.
  • Unfair relationships provisions (sections 140A - 140C): Here, HMT is asking to what extent the FSMA and FOS regimes make the unfair relationship provisions unnecessary. In addition, it requests views on whether, if these provisions are to be kept in legislation, with other rights and protections moving to FCA rules, this creates more complexity and confusion for lenders and borrowers and what the effect on innovation in the sector will be.

Sanctions

• The government’s initial view is that the CCA reform presents an opportunity to concentrate some of the consumer remedies in the FCA toolkit. However, it also recognises that the consumer credit market is in many ways unique among financial services products due to the large numbers of firms with different business models and products presenting varying risks across different consumer segments.
• As suggested above, the process of reforming the CCA is likely to result in HMT amending the FCA’s rule-making powers under FSMA in relation to consumer credit and consumer hire. The government is inclined for this to include exploration of the option of amending FSMA rule-making powers to enable the FCA to apply unenforceability as a sanction for breach of FCA rules in a wider set of circumstances than currently provided under FSMA, ie in a similar manner as under the CCA. HMT asks for input on this idea, noting that there would not be a role for court action in this scenario.
• There have been instances of unenforceability and disentitlement where breaches of information requirements have only been minor and there has been no evidence of consumer harm. HMT asks if respondents agree that the government should consider the proportionality of sanctions and ensure that they are relative to the consumer harm caused/potentially caused. It also asks what types of breaches of CCA rules sanctions should attach themselves to and why, eg should the disentitlement sanction be limited to the small sub-set of cases giving rise to unenforceability, where there is the greatest risk of harm?
• Regarding CCA provisions that give rise to a criminal offence (set out in Annex 2 to the consultation), the HMT asks for views on how valuable these provisions are and whether there are any provisions that are outdated because the practices they relate to are not used anymore, or whether removing some CCA provisions would lead to the return of these practices.

Consumer hire

• HMT seeks views on the merits in increasing the standards of conduct for consumer hire agreements to make them comparable to those for consumer credit. It cites the growing market in Personal Contract Hire (PCH) (consumer hire agreement) financing options within the motor finance market as an example of an area that might benefit from such a change.

Small agreements

• A small agreement 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. Some elements of the CCA and CONC do not apply to small agreements.
• The issue of small agreements was considered in HMT’s BNPL consultation response, where it was decided that to ensure consistency in consumer protection across current exempt BNPL agreements captured by the scope of regulation, the government intends to disapply section 17 of the CCA for these agreements when they are brought into regulation. The government considered that this was necessary because BNPL is frequently used for agreements below £50. However, this would mean that lenders offering agreements for interest-bearing credit not exceeding £50 would not be subject to, for example, CCA requirements relating to the form and content of agreements or FCA rules on creditworthiness assessments, while lenders offering BNPL agreements would be subject to these requirements. Given this inconsistency, the government is considering whether the small agreements provision in section 17 should be reviewed across all regulated agreements. HMT asks for views on what the impact of the section 17 provisions not applying would be.

Increasing equality and fairness in the credit market

The reform will also aim to increase equality and fairness in the credit market by improving accessibility and access to credit products for a range of consumers to make the consumer journey as inclusive as possible. The government sees this as an opportunity to make the consumer credit regulatory regime more inclusive for a wide range of consumers, including those with mental health concerns and low levels of financial literacy.

Chapter 5 contains a financial inclusion and equality impact assessment. The government expects the CCA reform to improve equalities and fairness across some of the following areas:

• Financial literacy and numeracy: This is an opportunity to ensure that overly complex language is simplified and written in a clear way to maximise consumer comprehension. HMT asks how the reform can ensure that firms provide information to consumers which is accessible for a wide range of financial literacy and numeracy levels.
• Financial inclusion and mental health: HMT makes the point that the action taken by the government during the COVID-19 pandemic to, among other things, amend default notices demonstrates how important the language used around debt and credit can be. There is already FCA guidance for firms on the fair treatment of vulnerable customers, but there may be more that can be done throughout the consumer credit product lifecycle. HMT is looking for input on this.
• Islamic finance: Currently, Islamic finance providers experience difficulties in reconciling the differences in terminology required in a Sharia compliant credit agreement with some of the prescribed requirements for credit agreements and pre-contractual information in the CCA regulations. This has resulted in some Islamic finance providers removing their Sharia compliant personal loans from the market. It is therefore desirable that the CCA reform will, to the extent this is possible, ensure that Sharia compliant credit agreements can be accommodated within the new regime. HMT asks for views on how this can be achieved, including in relation to the requirement for the use of APRs.
• Public sector equality duty: HMT asks for input on any implications of its policy approach for CCA reform on people with protected characteristics under the Equality Act 2010, and how the government can mitigate any disproportionate impacts on protected characteristics.

Developments in the EU

Consumer credit regulation is also a focus within the EU, with work well under way on a proposed Directive on consumer credits (CCD II) to revise and replace the current Consumer Credit Directive (2008/48/EC). On 2 December 2022, the Council of the EU and the European Parliament announced that they had reached provisional political agreement on the revised text of the proposal. The proposal is being considered under the EU’s ordinary legislative procedure. The Council and the Parliament will now need to approve the provisional agreement before going through the formal adoption procedure. For more information, take a look at this Engage article ‘EU consumer credit legislation in the digital era: Political agreement on CCD II reached’. CCD II will be of interest to those consumer credit firms with a European presence.

Authored by Julie Patient and Virginia Montgomery.