Consultation: Reforming the Consumer Credit Act 1974

On 9 December 2022, the Government announced the long-awaited consultation on reforming the Consumer Credit Act 1974 (CCA). The overall objective is to modernise and streamline regulations for the benefit of consumers and businesses. Due to the complexity, the reform is expected to take a number of years, but the consultation is the first step in the process. Responses from industry stakeholders are invited by 17 March 2023.

We set out below a summary of the consultation and what it means for lenders.

Background

When introduced over 50 years ago, the CCA transformed the consumer credit market, providing key legislation that still offers many protections to consumers today. However, the market today is very different from what the legislation provided for in the 1970s.

The CCA has been amended many times since its enactment, and other provisions have been made in the regulatory framework to meet changes in consumer credit, including the transfer of much of the oversight to the Financial Conduct Authority (FCA) in 2014. Nevertheless, the CCA is widely considered to be out of date and many stakeholders since the 2014 changes have been calling for further reform.

The Government recognised this need and in June 2022 announced its intention to reform the CCA with the ambition of moving most of the CCA from statute to FCA rules. This is recognised to be a complex task and it is anticipated any reform will take several years. This consultation is the first step in this process. The consultation is seeking input on (1) the definitions within the CCA, (2) the scope of the CCA, (3) the information requirements, (4) the rights and protections, (5) sanctions, (6) consumer hire and (7) small agreements.

10 Key points to note from the consultation

10 key points to note are:

1. Overall objective

The overall objective of the reform is to modernise and streamline regulation. The intention is that changes will allow the facilitation of innovation, increase accessibility to credit products, and contribute to sector and economic growth, whilst bolstering existing consumer protections.

2. Principles for reform

The government has developed five principles which will underpin the reform. These are:

• Proportionate: ensuring levels of consumer protection are appropriate balanced against the need to ensure the reform places proportionate burden on businesses.
• Aligned: the reform will be aligned with the implementation of the Future Regulatory Framework and will complement and support the Consumer Duty requirements.
• Forward looking: changes will need to be adaptable and keep in mind the needs of consumers and businesses as they change in the future.
• Deliverable: ensuring that any changes are deliverable, and that adequate time is allowed for changes to processes and procedures.
• Simplified: creating a regime that simplifies and modernises the terms in the CCA so consumers and businesses can understand the protections.

3. Definitions within the CCA

Updates to key definitions within the CCA may be required for several reasons: some have been transferred to or are replicated in the FCA handbook whilst others have become blurred in light of product innovation (the example given being the division between fixed sum and running account credit). Other concepts have required case law to clarify. The government’s intention is to create a simplified regulatory regime and it invites comments on what key terms need to be included or re-defined.

4. Scope of the CCA

The CCA currently has limited application to business lending. Sole traders are protected under the CCA as individuals, but, in its current form, the CCA does not apply to limited companies, LLPs, or lending/hire for business activities over £25,000. The government seeks input on whether the business lending scope should be altered.

5. Information requirements

As it stands, both the CCA and the FCA’s Consumer Credit Sourcebook contain rules governing the information provided to consumers before and after a consumer credit agreement is entered into. The government seeks views on (1) whether moving the requirements from legislation to the FCA would adversely affect consumer protection, (2) what the sanctions for non-compliance should be, (3) the form and content of information provided and how to strike the right balance between prescribing information and allowing flexibility, and (4) how to deliver consumer information in a more engaging way when agreements are entered into on mobile devices.

6. Rights and protections in general

Many of the rights and protections under the CCA will not be able to be replicated by the FCA in its current state, and so the Government is considering extending the FCA’s FSMA rule-making powers to enable this. Stakeholders are asked what their view would be on the risks/benefits of doing this and whether any specific rights and/or protections should remain as legislation. If any provisions are transferred to the FCA, the Government proposes retaining the following protections:

• Section 75: Connected lender liability (although it recognises that the scope may need to be reconsidered or clarified)
• Section 56: Deemed agency
• Section 94: The right to complete payments ahead of time
• Section 93: Interest not to be increased on default

Three specific areas of rights and protections under the CCA have been identified as needed more detailed questions are part of the consultation – (1) time orders, (2) the right to voluntary terminations and (3) the unfair relationship provisions. Stakeholders are invited to comment on, amongst other things, the extent that the CCA unfair relationship provisions are still required alongside the FOS and FSMA regimes.

7. Sanctions 

The current sanctions framework within the CCA is complimented by the FCA and its enforcement powers. The CCA has a number of strict sanctions, some of which involve a sanction rendering the loan or term unenforceable. The government is proposing to simplify the sanction regime and concentrate the consumer remedies into the FCA toolkit. These sanctions either require a court order or give rise to unenforceability during a breach. Firms are asked, firstly, to confirm whether they would be supportive of this expansion of FCA rules and, secondly, whether they have any comments on the proportionality of sanctions and what types of CCA rule breaches the sanctions should be attached to.

8. Consumer Hire

Consumer hire agreements are subject to lower standards than consumer credit agreements under the CCA and FCA rules. An example of this is the statutory right to terminate the hire agreement only coming into force 18 months after entering into the agreement. As use of consumer hire agreements has recently increased, the government is seeking input on whether to increase the standards of consumer hire agreements to match consumer credit provisions.

9. Small agreements

The final area of the consultation relates to small agreements under section 17 of the CCA. Regulated consumer credit agreements that do not exceed £50 (and are not hire purchase or conditional sale agreements) fall within section 17. Some parts of the CCA do not apply to these agreements, including requirements relating to the provision of statements and pre-contractual adequate explanations, which allows flexibility to credit providers. The Government invites comments on whether these exemptions should continue to exist (particularly in light of its proposals that section 17 should be disapplied for (currently exempt) Buy-Now Pay-Later (BNPL) agreements when they are brought into regulation).

10. Timescales

The consultation closes on 17 March 2023. Following the consultation, the government will provide a summary of responses and will set out next steps for CCA reform.

What’s next?

This consultation provides a long-awaited opportunity to help re-shape the outdated CCA provisions. The reform could provide opportunities for firms to extend their technology offerings with the comfort that regulation would be in a position to keep up with the fast pace of the market. However, this is a complex process which requires the government and stakeholders to keep in mind a number of competing issues. We’ll be providing more focused comment on each of the key areas.

Meanwhile, the consultation indicates that the government’s intention remains to bring interest-free BNPL into regulation ahead of the wider CCA reform. Draft legislation on the regulation of BNPL is expected to be published by the end of the year, as confirmed in the government’s response to the consultation on the regulation of BNPL. For our analysis of these proposals, see Buy-now-pay-later: government's response to the consultation - TLT LLP.

Contributions from Lucy Thorn and Alan Leroux