The Consumer Credit Act (CCA) has been around for almost 40 years. Whilst there have been many changes along the way, it persists, but in a very different regulatory environment to the one it was borne into. The Government has now made a commitment to update it and hopefully, bring it in line with the world in which credit providers operate today.
In December 2022, a Consultation Paper on reforming the CCA was published and on 10 July 2023, the Government published a Response to the Consultation. Here, we summarise the proposed changes and consider whether the Government goes far enough in bringing about wholesale change to the regime.
The Government’s intention is to align consumer credit regulation with the rest of the regulatory framework in the financial services sector. The proposed approach appears to be a step in the right direction for bringing about this reform.
What is the Government’s approach?
The initial Consultation set out five basic principles that underpin the changes:
- Proportionality
Consumer protection must be balanced with the burdens it places on businesses, particularly in the current economic climate. - Alignment
Aligning the changes to the CCA with the Financial Conduct Authority’s current consumer credit regime. - Forward-looking
Focusing on ensuring that the changes are adaptable to new ways of delivering consumer protection in the future (one of the major issues that the CCA has struggled with). - Deliverable
Ensuring that the changes are fit for purpose for the financial services sector and that enough time is given to businesses to implement the changes. - Simplified
Ensuring that the way in which these changes are drafted is done in a simplified manner (something that would be a welcome departure from the current regime for consumers and businesses alike).
The Government has sought opinions on the following:
- CCA definitions
Whether there are any existing definitions or concepts in the CCA that should be updated and clarified. For example, the consultation notes the potential need for terms such as “enforceable” and “enforcement” to be defined. - Scope of the CCA
In particular, to what extent the business lending part of the CCA should be changed. The Government believes that there is a clear rationale for moving almost all the information requirement provisions from the CCA into the remit of FCA rules. - Information requirements
The proposal is to move most of the information requirement provisions out of the CCA and incorporate these into the FCA regime. - Rights and protections
Here the Government thinks that there is a good case for amending the FCA’s rule making powers under the Financial Services and Markets Act 2000 (FSMA) by replicating the current rights and protections under the CCA. - Sanctions
The Government thinks that the supervisory and enforcement powers the FCA has could be adapted to encompass the CCA regime, as part of transforming and simplifying the requirements for businesses and the remedies offered to consumers.For example, the Government is keen to retain the CCA powers on unenforceability. Under the CCA one of the main powers to encourage compliance with form and content requirements is the risk of an agreement becoming unenforceable, (without going to court and seeking an order). Current FCA powers in relation to consumer redress do not hold the same sway in this regard, so we’ll either see some changes to FSMA, which would enable the FCA to operate in the same way and retain the consumer protection that unenforceability offers or more likely, unenforceability will remain under the CCA. - Consumer hire agreements
The current standards of rights and protections for consumer hire agreements are lower than for credit under both the CCA and the FCA regimes. The Government is considering whether it’s worth increasing the standards for consumer hire, to bring it in line with the rules around consumer credit. - Small agreements
Certain parts of the CCA don’t currently apply to small agreements (for credit at £50 or less). The Government is considering whether it is worth retaining this exemption.
In addition, the Government has considered:
- How these changes can help increase access to credit and financial inclusion. This is an opportunity to make the consumer credit regulatory regime more inclusive by ensuring that consumers, regardless of their background or income, have access to fair and affordable credit.
- Financial literacy and numeracy. The Consultation Paper states:
“The reform provides HM Treasury with an opportunity to ensure that overly complex language is simplified and written in a clear way to maximize consumer comprehension. This should mean that consumers with differing levels of financial literacy and numeracy are able to understand the consumer credit products available to them and make informed decisions”. - Islamic finance requirements, which the Treasury states: “is based on a belief that money is a medium of exchange and should not have any value in itself”. The current difficulties center around the form and content requirements of consumer credit agreements, which do not fit with the terminology that is required for a compliant Sharia agreement. The Treasury is looking at ways to accommodate Sharia agreements within the updated regime.
The Consultation Response
Overall, the Treasury has seen widespread support for the proposed changes set out in the Consultation. The response document confirms that, considering this, “the Government plans to move forward with an ambitious overhaul of the CCA”. The driver for change appears to be rooted in a lack of innovation under the current regime and the inability to adapt, given the current rate of technological change that the market is experiencing.
There is an acknowledgment that some areas of the regime may still require a legislative based approach, but many of the legislative provisions can be moved into the FCA Handbook, which we hope will lead to a more joined up approach. Keep an eye out for our upcoming article on what the changes may look like.
What does the FCA think about the Government’s plans?
The FCA has welcomed the consultation and broadly agrees with the Government’s plans. It acknowledges the advantages of moving certain CCA provisions into the FCA Handbook to make it easier for businesses and consumers to navigate the law in a simplified and more flexible manner.
In its earlier review of retained provisions of the CCA, published in 2019, the FCA was cautious about using its powers as a substitute for the CCA, especially in relation to sanctions, which it considers to be an important consumer protection measure.
As an example, it notes that the option for consumers to bring an action for damages under s. 138D FSMA is reserved for “customers with the financial capacity to pursue potentially costly litigation where significant losses have occurred”, and thus we can infer that this is unlikely to be seen as a good substitute for the current unenforceability sanction (where CCA agreements are not enforceable without a court order, if they do not conform to certain legislative requirements).
It recognises this as an important self-policing element of the CCA, incentivizing businesses to follow the form and content requirements set out in the legislation. It notes replacing the current sanctions is likely to have an adverse effect on consumer protection and advocates for some combination of current CCA provisions, FCA powers and the existing private right of action under s, 138D FSMA.
We await further commentary from the FCA on whether its position has changed following the consultation, as the reform process continues.
The legal view
For most credit providers, the changes will be welcome and long overdue. Having two parallel regimes under the CCA and FSMA has, for a long time, caused confusion for consumers and lenders alike.
The current legislation is arguably not fit for purpose in today’s market and the need for change is undeniable. What lenders and consumers need is a single regime that clearly demonstrates an understanding of today’s credit market, with the flexibility to adapt and change as time and technology move on. Whether this need will be delivered remains to be seen.
The Response broadly affirms the position set out in the consultation and demonstrates the appetite for full scale reform. However, this is not a quick fix.
The Government has confirmed there is likely to be a second consultation in 2024, following a process of policy development to build on the current proposals, assisted and supported by different stakeholders. It seems a new regime is still some way off and firms will need to wait for definitive information on what the reform will look like and timescales for implementation. Watch this space.
How can we help?
Our Financial Services Regulation team here at Capital advise on all aspects of credit and hire regulation and can assist you and your business in navigating this complex area. If you are a start-up, or scaling business, looking for an efficient way to access the commercial legal advice you need, quickly and without fuss, we can help. Get in touch with our Financial Services Regulation experts.
