All I want for Christmas is... reform of the Consumer Credit Act

It is coming, but whether it is before Christmas 2027 remains to be seen

HM Treasury has released a consultation into the reform of the Consumer Credit Act 1974 (CCA). “About time”, some may say. Reform has been on the cards since the FCA took over supervision of regulated credit back in April 2014 but it is fair to say that this is the first significant step forwards.

So, what does the consultation cover and, importantly, will the proposals really provide a framework for the modernisation and simplification of the UK’s consumer credit regulation?

The uniqueness of consumer credit regulation 

Consumer credit holds a unique position in the UK. All firms undertaking regulated activities need to be authorised by the FCA (and PRA where relevant) and must not only comply with the detailed requirements of the FCA/PRA handbooks but also deal with other relevant statutory requirements such as those dealing with consumer rights and AML/CTF.

Firms in the retail lending space also have the CCA to contend with – and that is no mean task. It is the CCA which can render agreements unenforceable without a court order, penalise firms heavily for failing to meet certain documentary requirements (including where there is no evidence of customer detriment) and impose criminal liability on authorised firms. Let’s be honest, it does not make much sense that an inaccurate annual statement on your fixed term car loan renders the agreement unenforceable while the same issue on your largest debt, your mortgage, does not.

It is good news for the sector that reform does, at last, seem to gathering momentum especially given that the stated objectives are to end up with a regime that provides increased access to new and innovative credit products for consumers and costs savings for UK firms. Not such good news that HMT acknowledges that reform will take “a number of years”.

Key areas of potential reform 

In other good news, the consultation is wide-ranging - it appears that there is little that is off the table for discussion at this stage. There are a few points worth drawing out at a high level:

• Business lending – currently business use facilities exceeding £25,000 sit outside the regulatory perimeter. The thinking being when that limit was set that sole traders and small partnerships able to borrow at that level were well able to look after themselves. The consultation asks whether that scope should be changed. Given that the evidence is that many lenders avoid business lending sub-£25,000, an extension of the exemption to all business lending could drastically improve the availability of business credit facilities for smaller businesses. What would be unhelpful is a removal of the current exemption or an increase in the current minimum amount.
• Information requirements – the current requirements provide for a significant amount of information to be provided to prospective customers and much of it is duplicative. Given that many facilities are now entered into using digital means, the consultation provides a great opportunity for information requirements to be brought into the 21st century and to reflect the way in which customers interact with lenders and credit-brokers. It is difficult to see what benefit it is for a customer to need to scroll through pre-contractual information which tells them exactly what the agreement they sign 1 minute later does. We suspect that if one looks at the statistics for how long a customer spends looking at the pre-contractual information on screen, it would put even the most experienced speed reader to shame.
• Rights and protections – the key question here is whether, given the overlap with other consumer-focused protections brought in separately to the CCA, the existing CCA provisions are necessary to provide additional customer protection. While it is true that many rights and protections set out in the CCA cannot be replicated using the FCA’s current rule-making powers, there is a more fundamental question, certainly for some of the more penal requirements, as to whether they truly give consumer protection which is proportionate to the penalties they impose on firms.

The Five Principles

Five principles are proposed which, it is envisaged, will set the framework for the reform process:

• Proportionate - The reform should ensure appropriate levels of consumer protection balanced against any potential burdens on business.
• Aligned – The reform should be aligned with the implementation of the Future Regulatory Framework, and complement and support the Consumer Duty requirements, and should ensure consumer credit regulation broadly aligns with the style and substance of current financial services regulation whilst recognising that due to the nature of consumer credit a tailored approach may be required in specific areas. The reform should also align with wider duties and obligations, such the Public Sector Equality Duty.
• Forward-looking – The reform should be mindful that changes made now to the consumer credit and consumer hire regulatory landscape should be adaptable to future ways of delivering credit and consumer hire to consumers and to the needs of consumers and businesses as they may change in the future.
• Deliverable – The reform should be designed to be deliverable for the financial services regulators and industry.
• Simplified - The creation of a regulatory regime that simplifies and modernises ambiguous technical terms used in the CCA 1974.

Next steps 

The consultation was included in the government's Edinburgh Reforms which were announced on 9 December 2022. The deadline for responses to the consultation is 17 March 2023 after which the government will consider the responses and develop more detailed policy proposals for a second phase of consultation. Any implementation of the final approach to reform will likely require primary legislation to be implemented via Parliament.