CCA reform briefing note

Phases

The CP explains that HMT will take a phased approach to consulting on its policy approach, outlining its detailed proposals for a new regime across two consultations:

• Phase 1 – the current CP, which outlines the Government’s overall vision for a reformed regime as well as its approach to information requirements, sanctions and criminal offences.
• Phase 2 – a further consultation will set out how the Government intends to reform the scope of regulation and rights and protections under the CCA.

As there is substantial overlap between Phases 1 and 2, HMT aims to carry out both phases before implementing any changes. It notes that primary legislation and potentially secondary legislation will be needed for implementation of the changes, as well as a detailed rulemaking process by the Financial Conduct Authority (FCA) and appropriate transitional periods to allow industry to prepare and adapt to new rules.

Information requirements

The current CCA rules around information are often too complex and hard for consumers to understand. 

A significant percentage of consumers generally find financial documentation difficult to understand and the proposed reforms are intended to deal with this in the consumer credit space. According to FCA data, approximately 36% of adults felt they had low levels of knowledge about financial matters, with 59% of those in financial difficulty reporting low levels of knowledge. The effectiveness of disclosures in aiding consumer understanding is variable. The prescriptive content and format of many disclosure requirements in the CCA means it is more difficult for lenders to be able to tailor disclosure requirements to the needs of consumers to ensure sufficient consumer understanding.

HMT intends to repeal all of the information provisions in the CCA and have these recast into FCA rules. However, this will not be a simple copy and paste of the requirements. Instead, the FCA will undertake a review and consult as necessary on any specific rules covering the information provided to consumers which it considers should be required to apply alongside its Principles for Businesses (including the Consumer Duty). The FCA intend to consult on disclosure rules for the new Buy Now Pay Later (‘BNPL’) regime in the near future, which may provide some insight as to how the FCA will seek to recast the existing CCA information and disclosure requirements in a more flexible manner, which takes account of developments in the presentation of this information to consumers (i.e. via online apps, websites, etc).

HMT also discusses in the CP certain technical matters including small agreements, modifying agreements and electronic disclosure. HMT proposes to repeal the small agreements provisions in s.17 CCA across all regulated agreements and leave it to the FCA to consult as to whether and how its rules should apply to these types of agreement. On electronic disclosure the proposal is to repeal the current CCA provisions in s.176A CCA and this should be welcomed by firms as these provisions often create practical issues for firms and customers in relation to communications. HMT also proposes to repeal the requirements for modifying agreements, viewing existing FCA conduct regulation and consumer protection law as adequate safeguards for consumers. Again, this will be another welcome development given that the requirements can undermine the ability of the lender and borrower to efficiently agree changes to a credit agreement in a straight-forward manner (as was highlighted during the COVID pandemic in the context of forbearance arrangements).

Sanctions

HMT accepts that the approach to sanctions set out in the CCA is notably different from the modern approach to regulating financial services and the landscape has changed considerably since they were introduced. A major shift in the approach to sanctions is proposed by HMT, through the repeal of the automatic sanctions regime contained in the CCA for breaches of technical, prescriptive information requirements for example. HMT says automatic sanctions ‘are not needed in the event of a breach of requirements by a firm and that the existing FCA regime and court process provides robust consumer protection’. Such sanctions may be ‘inconsistent’ with the move towards more principles, outcomes-based proportionate regulatory requirements and by their nature, automatic sanctions would need to attach to highly prescriptive requirements which are not compatible ‘with the prevailing direction of the FCA’s approach to proportionate regulation’.

The removal of these sanctions will constitute a significant shift in consumer lending regulation. At present, these sanctions may currently prevent lenders from enforcing the terms of their credit agreement without a court order, or disentitlement them to interest earned under the agreement due to non-compliance with the CCA information requirements, even where such non-compliance may not actually lead to any consumer harms. It is expected that the FCA’s existing approach to enforcement will continue to provide an appropriate deterrent to non-compliance for lenders, if these sanctions are removed from the CCA regime moving forwards.

Criminal offences

Under its current rule-making powers the FCA cannot reproduce in its rules the criminal offences in the CCA. However, it is also of the view that, in general, the criminal offences in the CCA are no longer needed given the FSMA regulatory toolkit. Given this HMT is asking for views on whether it should retain some or all of the criminal offences in the CCA, or whether they can all be repealed.

Phase 2

As mentioned above HMT is taking a phased approach to CCA reform and Phase 2 will focus on exploring rights and protections, as well as key definitions and the scope of consumer credit regulation. Whilst HMT does not provide detailed proposals on Phase 2 in the CP it does provide some interesting high-level indications of its direction of travel. For instance, it notes that policy work is required on the scope of the regulated credit regime in particular on consumer hire and business lending to sole traders and small partnerships. It adds that decisions will need to be made on whether and how they should be regulated. HMT will also review the key credit definitions to reflect market developments which may also require broader changes to the FSMA Regulated Activities Order. Another interesting comment from HMT concerns s.75 CCA which 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. HMT notes from the feedback it has received that consumer groups believe this is an important provision which could not be replicated by FCA rules.

Technology

It comes as no surprise that HMT intends to future proof the new regime as much as possible. In Phase 2 HMT will review certain areas including complexity in digital and electronic communications, electronic signatures and digital contracts, and more flexible, less prescriptive consumer journeys and communications.

Islamic finance

HMT will also be looking at how a reformed consumer credit regime can remove barrier to enable Sharia compliant finance to be offered by firms and address any unmet need within the market. HMT understands from stakeholders that some of the prescription and terminology required in disclosure documents relating to interest, settlements and rebates is not easily reconciled with the principles of Islamic Finance. HMT will explore this further as part of its policy work for Phase 2.

Green finance

HMT is aware that the CCA presents a number of barriers to green finance products and is looking to remedy this in Phase 2. In particular, consumer groups have raised the importance of many consumer protections like s.75 CCA as helping to give consumers confidence in purchasing green finance products where firms are less established or products involve new technology.

Next Steps

The CP closes on 21 July 2025. HMT will then consider the responses and plans to issue a response to the consultation followed by the Phase 2 consultation “in due course thereafter”.

What firms should be thinking about now

There are a number of steps that consumer credit firms should be thinking about in light of the CP and we can assist with these. 

Here are just a few:

• Review the CP to understand the direction of travel of the reforms including which CCA provisions are likely to be removed in their entirety.
• Engage with HMT and respond to the CP.
• Begin internal discussions on how the proposed reforms will impact the business model.
• Map current compliance obligations under the CCA and identify which may be affected.
• Monitor any communications from the FCA.
• Think about how existing systems and controls will need to adapt.