This article was first published on Thomson Reuters Regulatory Intelligence on 10 March 2023.
Among the documents that the Government published last December as part of its Edinburgh reforms was a consultation paper on reforming the UK’s Consumer Credit Act 1974 (CCA 1974). The Consultation Paper was fairly well trailed with the Government announcing earlier in June that it intended to reform the CCA 1974. There have been a number of calls advocating reforms to the CCA 1974 which has been around for almost 50 years on the basis that the way consumers interact with credit products has significantly evolved since the Act was first introduced, particularly through the prevalence of digital customer journeys and innovative products from new FinTech market entrants and retail banking providers alike.
In addition, since the CCA 1974 was introduced various parts of it have been transferred to the Financial Conduct Authority’s (FCA) Handbook on the basis that updating regulatory rules is far easier than updating legislation. The most notable of these transfers occurred in 2014, when much of the regulation of consumer credit was transferred from the Office of Fair Trading to the FCA which included the creation of a new sourcebook in the FCA Handbook called CONC. Furthermore, the current consumer credit regime incorporates the Consumer Credit Directive 2008 which sought to establish a harmonised EU framework for consumer credit. The Directive was transposed into UK law through the Consumer Credit EU Directive Regulations 2010 and FCA rules. The UK’s exit from the EU also provides the Government with a further opportunity to amend the domestic consumer credit regime.
The overall objective for the Government’s reform of the CCA 1974 is to modernise it so that it follows more closely the approaches to other areas of UK financial services regulation. So what this means is that the Government is not envisioning provisions in the CCA 1974 being simply replicated into the FCA Handbook but rather there may be some provisions that may be removed entirely as they are no longer desirable or possible to move to FCA rules or they may be modified or refined. Another key objective for the Government is to improve accessibility and access to credit products in order to make the consumer journey as inclusive as possible. Net zero is another objective, with the Government mindful of some of the concerns raised by some finance providers regarding the compatibility of the CCA 1974 with the provision of credit for certain products that may help the UK reach its net zero target. When deciding what to do the Government states that its policy process will be informed by five key principles – proportionate, aligned, forward-looking, deliverable and simplified.
There are, of course potentially significant implications for firms and consumers arising from this reform. The CCA 1974 stands apart from the wider financial services regime in the UK in providing strict sanctions on lenders who fail to meet certain prescriptive information requirements, including both unenforceability provisions and also ‘disentitlement’ provisions, which provide that in some circumstances a borrower has no liability to pay interest for periods of non-compliance by a lender.
The Government states that the consultation paper that has been published is the first stage in a longer process and as such it asks for input on the strategic direction of the reform. Chapter 4 of the consultation is broad, with the Government asking for stakeholder input on a wide range of topics including definitions within the CCA 1974, the scope of the CCA 1974, information requirements, rights and protections, sanctions, consumer hire and small agreements.
As regards the scope of the CCA 1974, stakeholders have been invited to comment on business lending. Many practitioners operating in the consumer credit sector will be familiar with the requirement in the CCA 1974 that whilst lending to limited companies and limited liability partnerships fall outside the scope of the Act, lending to sole traders and some partnerships fall within scope unless the lending satisfies the exemption that requires the credit to be for greater than £25,000. Arguably, this requirement of the CCA 1974 has discouraged lending to sole traders and partnerships under £25,000.
In terms of information requirements the Government reports that it believes that there is a clear rationale for moving almost all the provisions from the CCA 1974 into the remit of FCA rules. The exact rules will then be determined by the FCA. In the consultation the Government provides two illustrative examples. The first example looks at the provision of pre-contractual information, which is currently mandated in legislation, and explores how the legislation could be repealed and replaced with FCA rules. The second example, highlights some issues currently associated with the dissemination of Notice's of Sums in Arrears (NOSIA's) under section 86B of the CCA 1974. It explores how these could be navigated, should they be moved to FCA rules. One of the key questions here will be whether the highly prescriptive requirements for credit related documentation will find their way into the FCA Handbook or whether the FCA will follow a more outcomes-based approach.
Rights and protection
There are a large number of rights and protections in the CCA 1974 regime. In particular, section 75 CCA 1974 makes providers of certain types of regulated credit jointly and severally liable with a supplier for a misrepresentation or breach of contract in relation to goods or services financed by the credit agreement. The consultation paper acknowledges that there are certain rights and protections under the CCA 1974 that cannot be replicated using the FCA’s current rule making power (including section 75). It is therefore asking stakeholders for views as to whether the FCA’s rulemaking powers should be amended to enable FCA rules to replicate the effect of rights and protections currently in the CCA 1974. Among other things, the consultation notes that it might be undesirable to move certain provisions like section 75 to FCA rules as the case law associated with them may lose their status as a binding precedent. However, as part of the review, the scope of section 75 could be reconsidered or clarified, in which case the existing case law may no longer be relevant.
Three specific areas of rights and protections under the CCA 1974 have been identified in the consultation as warranting more detailed consideration. These are: time orders which require complex court applications (sections 129 - 130), the right to voluntary terminations which is an important protection for hire-purchase and conditional sale agreements (sections 99 and 100) and unfair relationships provisions which gives a court extensive powers if it finds that the relationship between the creditor and the consumer arising out of a credit agreement (or any related agreement) is unfair to the consumer (sections 140A - 140C). The Government’s focus on these areas at this stage is to get a better understanding of differing stakeholder views rather than indicating any preferred policy approach.
Given that the FCA has finite resources and cannot closely supervise all firms in the market the Government is minded to explore the regulator’s rule making power to enable it to apply unenforceability and disentitlement as a sanction for breach of FCA rules in a wider set of circumstances than currently provided under the Financial Services and Markets Act 2000 (FSMA). The Government provides some suggestions as to a possible approach on unenforceability stating that sections 26 to 30 (sets out when an agreement is unenforceable and then gives the FCA and the courts the power to allow enforcement if it appears just and equitable) and section 138E (subject to exceptions, provides that a breach of an FCA rule cannot make a transaction void or unenforceable) of FSMA could be extended or supplemented. In addition, the Government also asks whether there should be some consideration of proportionality citing the debates on the Consumer Credit Bill 2006 which made it clear that the new sanctions were intended to be punitive and act as a deterrent, rather than being linked to consumer harm as is the case for sanctions under the CCA 1974. The direction of travel on enforceability and disentitlement provisions will be something that the market will be keeping a close eye on.
When the Government’s reforms to the buy-now-pay-later (BNPL) sector are implemented section 17 of the CCA 1974 will be dis-applied. The Government felt that this was necessary because BNPL is frequently used for agreements below £50. However, the outcome from this is that lenders offering interest bearing credit not exceeding £50 would not be subject to certain of the requirements under the CCA 1974 whereas interest-free BNPL credit would be subject to these requirements. Given this inconsistency, the Government is considering whether section 17 should be reviewed across all regulated agreements.
The Government has also asked for stakeholder views as to what it needs to take into account when reforming the CCA 1974 to ensure that Sharia compliant loans and credit cards can be expressly accommodated. The Government is mindful of the difficulties in reconciling the differences in terminology required in a Sharia compliant credit agreement with some of the prescribed requirements for credit agreements and pre-contractual information.
The reforms to the CCA 1974 sit alongside other reforms including those to BNPL and the Consumer Duty which comes into force on 31 July 2023. The Consumer Duty is discussed in chapter 2 of the consultation with the Government noting that it is not designed to replicate the effect of the CCA 1974 protections nor does it facilitate redress for consumers through the courts or replicate the unenforceability sanctions. However, it does state that, 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.
Given the breadth of the reforms to the CCA 1974 change will, unsurprisingly, not happen overnight. The deadline for responding to the consultation is 17 March 2023. Thereafter the Government expects the reform process to take several years. Following stakeholder feedback, it is expected that a second consultation with more detailed proposals will be published. The latest Regulatory Initiatives Grid indicates that a consultation response document is expected in Q2 2023. The FCA will also issue a consultation on its proposed approach. Implementation of the final approach will likely require primary legislation, which will be brought forward when parliamentary time allows.