UK Treasury consults on Consumer Credit Act reforms

Andrew Barber and Rachael Preston of Pinsent Masons were commenting after the Treasury opened a consultation on reforms (71-page / 779KB PDF). The move is part of a wider package of measures dubbed the ‘Edinburgh Reforms’ which the Treasury is proposing to take to streamline financial services regulation and promote investment and growth.

“Many stakeholders – including industry participants, consumer protection groups and customers themselves – agree that changes to the consumer credit regime are long overdue,” Preston said. “The prospect of reform is exciting especially if it facilitates greater innovation and competition in the market, enables new products and providers to emerge and better serves the UK’s growing and dynamic customer base.”

“Moving much of the regime into the Financial Conduct Authority’s (FCA’s) Handbook will also make legal and regulatory compliance simpler and more consistent for firms, particularly given the introduction of the FCA’s new consumer duty in July 2023 and changes to regulatory guidance on the treatment of vulnerable customers. This is a once in a generation opportunity to fix a fundamental pillar of the retail finance market,” she said.

Andrew Barber of Pinsent Masons said: “The consultation shows that the Treasury appears to have listened to a number of industry concerns with the CCA. In particular, the Treasury acknowledges that some of the sanctions for non-compliance can arise even where only minor breaches of the CCA have arisen and there is no evidence of consumer harm. Firms should use the opportunity that the consultation presents to put forward a position for more proportionate sanctions for minor breaches, particularly given the FCA may be given new or wider powers to deal with matters that would have previously progressed through the courts.”

The CCA came into force in 1974. Among other products, it governs credit card purchases, personal loans and motor vehicle finance agreements. A review by Christopher Woolard into the unsecured credit market in 2021 recommended a more outcomes-focused and holistic approach to regulating consumer credit in the UK, and the government has previously described the legislation as “highly prescriptive and increasingly cumbersome and inflexible”.

In its new consultation paper, the Treasury confirmed its intention is to remove many of the current requirements from statute and replace them with “recast” FCA rules.

The Treasury said: “It is the government’s intention that this reform will facilitate innovation in the credit sector and increase accessibility of credit products, contributing to growth in the sector and the economy more broadly. This is also an opportunity for the government to bolster existing consumer protections to ensure customers remain adequately protected in a modern and increasingly digital economy.”

Precise details of the changes to expect to the CCA requirements are not outlined in the Treasury’s consultation paper. However, the Treasury confirmed five principles that the reforms will be built around.

First, the reforms will be proportionate. This means they will “ensure that levels of consumer protection will be appropriate, whilst balancing the need to ensure that the reform places proportionate burdens on business”.

Second, the reforms will align with other areas of UK financial services regulation. Notably, these include the ‘future regulatory framework’ – proposals to revamp the UK’s financial services regulatory framework and use a comprehensive ‘FSMA model’ of financial services regulation now the UK is outside the EU, which would be delivered via provisions in the Financial Services and Markets Bill currently before parliament.

The Treasury also confirmed that as part of the ‘aligned’ principle the CCA reforms will support the Consumer Duty requirements. It said that while the Consumer Duty “does not fully replicate all aspects of consumer protection found in the CCA”, it does alter the context in which CCA protections now apply.

It said: “For example, the requirements under the Consumer Duty’s consumer understanding outcome, relating to firm communications with consumers, may go some way to substitute the need for excess prescription on some CCA information requirements. Similarly, the requirements in the duty for firms to provide appropriate levels of consumer support may allow a fresh consideration of the appropriateness of the current CCA rights and protections.”

“By reviewing the consumer protections in the CCA in the context of the additional protections offered by the Consumer Duty, the government can simplify the behavioural framework which firms must abide by to ensure optimal outcomes for consumers,” it said.

Another principle that will underpin the CCA reforms is that the changes will be forward-looking, so that they are “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”.

The other principles underpinning the reform are that reforms will also be ‘deliverable’ by regulators and industry from an internal process perspective with adequate time allowed for potentially significant changes to take effect, and ‘simplified’, by modernising “ambiguous technical terms” in the CCA so as “to make it clear to consumers what protections they have” and easier for firms both to communicate these protections and comply with requirements placed on them.

The Treasury said that it expects the process of fully reforming the CCA to take “several years”.