The UK Treasury has published its response to its December 2022 consultation on reforming the Consumer Credit Act 1974 (CCA) (see briefing Consumer Credit Overhaul Confirmed). The consultation was published on the same day that the Government announced a package of reforms for the existing financial regulatory framework and that the FCA issued its approach to the implementation of the Future Regulatory Framework (see briefing Big Bang 2.0 The Edinburgh Reforms).

The consumer credit landscape has changed considerably since the CCA was enacted. The Government has been transferring parts of the CCA out of legislation and into the FCA regulatory framework over the years.

In 2022, the Government announced an overhaul of the consumer credit framework. The consultation outlined plans to remove many of the provisions in the CCA and recast them in FCA rules. The Government felt that that Brexit gave it a chance to align consumer credit regulation with both modern and domestic realities. The consultation sought views on strategic direction, in particular, whether and how key provisions (eg sanctions, scope, information requirements) remain fit for purpose.

What does the response paper do?

The response paper summarises the feedback that the Government received to its December 2022 consultation, particularly from consumer and industry groups on different aspects of the CCA.
The Government confirms it will be proceeding with overhaul of the CCA and will be moving the majority of CCA into the Financial Services Markets Act (FSMA) model but is also thinks that there are some aspects of consumer credit that are best dealt with through legislation. The Government considers that five principles should underpin the reform process:

1. a proportionate approach ensuring appropriate levels of consumer protection, balanced against the burden on business;
2. aligning the reform with implementation of the Smarter Regulatory Framework and ensuring it complements the Consumer Duty;
3. a forward-looking approach which can adapt to future ways of delivering credit;
4. an approach that is deliverable for stakeholders and adequate time for implementation; and
5. simplifying and modernising approach so that consumers are clear about protections available to them. 

Feedback from the stakeholders focused on the deliverable principle and whether a phased approach should be adopted. The Treasury is therefore seeking views on whether a phased approach is desirable.

Do firms need to do anything now?

Not really. Changes are coming but nothing definite yet. The December 2022 consultation represented the first stage of the reform process. CCA reform will last a number of years and could probably involve detailed rulemaking process by the FCA and transitional periods to allow industry to prepare.

The Government will be carrying out policy development to produce more detailed proposals, with the aim of publishing a second stage consultation in 2024. It wants to develop a detailed policy approach before deciding on manner of implementation. It also wants to look at whether a phased approach to implementation may be more suitable (eg making changes to information requirements and associated sanctions first and other aspects later) but notes that dividing reforms into discrete phases may not be feasible and may lead to higher transitional costs for the industry.

Views on aspects of the CCA

• Definitions within the CCA: Some respondents felt that definitions such as fixed versus running account prevented innovation and forces lenders to fit products into these categories. They also argued that products such as BNPL do not fit into either category. Some respondents felt that section 18 (the provision relating to agreements containing multiple transactions involving different categories of agreement) was outdated given removal of the principal £25,000 limit in 2006.
• Scope: Views were sought in relation to business lending, small agreements and consumer hire. Industry groups were in favor of reducing the scope/creating a separate set of requirements and protections for small business lending in the FCA Handbook. They also felt that some associated business protections were not necessary where a business has loans for greater than £25,000 that are not subject to the same protections. Consumer groups felt that regulation should be extended to all finance or that 25,000 limit should be extended.
• Information requirements: Many agreed with the proposal for moving information requirements to FCA rules and argued that the following could be updated in the process of transferring the requirements: Pre-Contractual Credit Information (PCCI), Notices of Sums in Arrears (NOSIAs) and Default Notices.
  
  There was little support from industry groups for overly prescriptive requirements in relation to the form of information, given changing communication channels. Consumer groups tended to favor higher level of content prescription to support minimum standards. There was some support among responses for any future regime to consider modern communication channels for engagement  eg through use of links, graphics, videos, device notifications.
• Rights and protections: The Government sought views on time orders, voluntary termination rights and section 140A (unfair relationships). Some argued that there was duplication and some overlap in terms of protection offered in the CCA and the Consumer Protection from Unfair Trading Regulations and the Consumer Rights Act. Many stakeholders felt that section 75 could not be replicated and expressed some concern that moving some provisions to FCA rules would lead to a loss of helpful case law.  There was suggestion that section 75 could be modernised and clarified (eg transactions where the debtor creditor supplier chain has broken).
  
  Some industry groups felt that time orders are rarely used (with some arguing that FCA forbearance rules and Consumer Duty could be more appropriate), while some consumer groups felt that time orders encouraged lenders to act responsibly towards borrowers in financial difficulty. Some respondents felt that modern day use of voluntary termination had diverged from the original intention, with voluntary termination being used in motor finance where customers are not in financial difficulty. Some stakeholders considered that unfair relationship provision should be redrafted as it is currently unclear, difficult to interpret and grants court wide discretion. The need for Section 140A was questioned by some, given the strong protection afforded by FOS 
• Sanctions: The Government sought views on types of sanctions, including enforceability without a court order and unenforceability during a breach. Many respondents regarded unenforceability as one of the key problems in the CCA, arguing that it was disproportionate and applied even for trivial breaches. It was argued that the high costs of non-compliance leads to a tick box compliance approach rather than an approach adapted to consumer’s needs.
  
  Many argued that unenforceability should be removed and not replicated in FCA rules as other avenues for redress (e.g via FOS) provide sufficient sanction and deterrence. Where there was support for replicating it in FCA rules, it was argued that it should only be applicable to few core requirements where there was a serious risk of actual consumer harm.

Lorraine Johnston and Bradley Rice are partners in the financial regulation practice at Ashurt.