How will you celebrate the Consumer Credit Act’s Golden Jubilee?

Reforming the Consumer Credit Act 1974 – Consultation Response

It’s been a busy month for financial services reform, with the “Mansion House Reforms” following swiftly on from the Financial Services and Markets Act. Included in the reforms is the government’s consultation response on reform of the Consumer Credit Act 1974.

The CCA is a cornerstone of UK consumer credit so there’s a lot riding on getting this right. As the government notes, “billions of credit card purchases, personal loans and consumer hire agreements” are governed by the highly prescriptive and inflexible rules of the CCA.

Why reform?

There’s no prize for pointing out that the ways in which consumers interact with credit have moved on in the last half century. Reform of the CCA has been on the cards since 2014 (when there was a transfer of provisions to the FCA). The first significant forward step came in June 2022 when the government announced its intention to reform the CCA to ensure it is fit for purpose and keeping pace with technological advancements and changing consumer needs. This was followed by the launch of a consultation in December 2022 (for more background, see our previous post).

The government’s stated intention is to reform the CCA to “facilitate innovation in the credit sector, increase accessibility of credit products, and contribute to growth in the sector and the economy more broadly”. The government also sees this as “an opportunity to bolster existing consumer protections to ensure customers remain adequately protected in a modern and increasingly digital economy.”

Areas of reform?

The core proposal from the consultation remains that the government will repeal many of the CCA’s provisions and ‘recast’ them in FCA rules, following the FSMA model. This should allow for more flexibility as rules can be updated more easily than primary or secondary legislation. Beyond confirming that the government’s plan to move forward with this, the Response paper provides little by way of firm conclusions on the finer detail and acknowledges that the proposals are at “an early stage of policy development” and that the scale and complexity of reform means that it will take “a number of years” to deliver.

For now, therefore, we can only infer the possible areas for reform from the responses that are highlighted in each of the five areas identified in the consultation: scope, definitions, information requirements, rights and protections and sanctions. These include:

• Small business lending: the existing scope looks set to shift (though consumer groups and industry are arguing this in opposite directions). It is possible that a separate set of requirements and protections are developed for small business lending in the FCA Handbook;
  
  
• Consumer hire: currently consumer hire has fewer protections then consumer credit. The scope and form of regulation of consumer hire may change, with a shift towards a “same risks, same protection” model;
  
  
• Changes to definitions: some respondents noted that the current definitions could be changed to better facilitate emerging products (e.g. Buy-Now, Pay-Later products do not fit neatly into the current division between fixed sum and running account agreements. The definitions for credit tokens, multiple agreements and modifying agreements may also be re-thought);
  
  
• Information requirements (e.g. PCCI, NOSIAs and default notices): respondents were supportive of moving information requirements from secondary legislation into FCA rules, potentially making them less prescriptive and more agile – while aligning with the Consumer Understanding outcome of the Consumer Duty (but some consumer groups wanted to ensure that the sanctions regime for non-compliance continues in the same manner);
  
  
• Rights and protections: there was acknowledgement that certain legislative protections are not mirrored in other legislation and that their effect may not easily replicated in FSMA or FCA rules (e.g. court-based rights). There was also concern that moving certain provisions into the FCA rules could result in the loss of case law;
  
  
• Sanctions: the sanctions concerning unenforceability (without a court order, during a breach and disentitlement) appears to have drawn the expected comments from industry stakeholders who have argued that it is disproportionate, encourages ‘tick-box’ compliance and adds to the cost of credit. Some industry stakeholders were open to replicating unenforceability in FCA rules for a few core requirements where there is a serious risk of actual consumer harm. Consumer groups also appear to have acknowledged that a more proportionate application of sanctions may be on the cards, while encouraging the government to allow the courts to continue their role in enforcement action arguing that the FCA is not resourced to carry out the role; and
  
  
• Financial inclusion: the consultation acknowledges that the prescriptive information requirements in the CCA do not always support vulnerable customers with low financial literacy or mental health. Again, the Consumer Duty may offer a way forward for firms to consider the individual needs of customers.

A damp squib? 

Whilst the Response does not yet provide clarity on the direction ahead it points out the complexities and wide-ranging stakeholder views. The government has stated that it will now undertake policy development to produce more detailed proposals and to further engage stakeholders. The plan is for a second stage consultation in 2024.

The Response also notes that the government remains interested in hearing whether a “phased approach to reform” might be preferable (and viable).

Ultimately reform will require primary legislation to be brought before Parliament, consultation from the FCA on new rules and transitional periods to allow industry to prepare.

So raise a glass to the Jubilee and the second stage consultation in 2024!