Consumer Credit Reform

HMT has indicated that it recognises that significant aspects of the CCA regime are not fit for purpose and need repealing. It is keen to keep the “best of the CCA” and wants to enable the industry to feel the benefits of reform as quickly as possible, but it also wants to design the new framework with care to make sure it works for the future. CCA reform is likely to be very disruptive for firms and time will be needed to implement any new regime, but there will need to be a balance in that and feeling the benefits of reform quickly.

HMT wants to see the new regime based on outcomes-based principles.  There is a recognition that there is an important role for the Consumer Duty in delivering a new consumer credit regime which works for the ever-changing landscape in this market.  The Government wants the consumer credit regime to be forward-looking to enable further technological developments and innovation, so that consumers can engage with credit products in the most suitable way for their needs, for example using mobile phones.

The new regime needs to be proportionate, aligned, forward-looking, deliverable, and simplified.

The consultation paper states that the CCA is too prescriptive, confusing and duplicative.  This means that firms cannot adapt to customer needs.  It is inflexible, which prevents innovative technological developments to be adopted and hampers product innovation.  HMT also recognises that CCA is complex with requirements spread across overlapping requirements.  It is also recognised as having disproportionate sanctions which do not focus on consumer harm and good customer outcomes.

HMT are clear that it remains committed to continuing to deliver high standards of consumer protection. It is also keen to keep some of the current rights customers have under the CCA (such as s75 rights).But it carefully considers the protections in place under the Financial Services and Markets Act regime (FSMA) and concludes that it currently does not believe there is evidence that the repeal of the CCA provisions removes any real protection for customers.

The test it is using is this:

• Could a similar outcome to what is being done by the CCA be provided by FCA rules (or other protections under FSMA)?If so, then the provisions of the CCA should be removed and the FCA given the ability to create the rules needed;
• If a similar outcome to the CCA could not be achieved, would removing the CCA requirements mean consumers don’t then have robust consumer protection? If the consumer would still have robust consumer protection, then the CCA rules can be repealed.
• If CCA requirements are needed to be retained, this does not mean they should be retained in their current form, but HMT is prepared to reformulate them to better address the intended outcome of those requirements.

There will be extensive repeal of all the detailed information requirements that remain in the CCA, including the repeal of the CCA requirements around pre-contract information, agreement information, multiple agreements, modifying agreements, post contractual requirements, and default and arrears prescribed notices.  It also intends to repeal the detailed prescription in s176A.  It believes that sanctions are contrary to Government and FCA policy in relation to proportionate regulation and moving away from prescription in favour of more principles and outcomes-based requirements, which enable flexibility and tailoring of communications.  HMT has also indicated that it does not think the FCA needs additional powers to fill any gaps left by the removal of the CCA sanctions. 

Government does not expect a copy and paste approach. It needs to get the right balance of consumer protection and proportionate regulation., with the right level of information provided and at the right times. It is not clear if there will be any statutory controls on how the FCA may approach this. There will need to be extensive engagement with the FCA to ensure that the excesses of the CCA are not effectively reproduced via the Handbook and that flexibility is preserved for firms under the new regime.

• There will no longer be a statutory carve out for small credit agreements (those under £50).Any light touch regime will effectively be created by the FCA. There may be scope for industry to consider what regime might be appropriate for lower value lending.

• The rules on variations will be likely to come within the FCA rules. There are completing requirements in other legislative provisions and the CCA does have a relatively flexible approach in some areas. The industry will be keen not to lose that flexibility in any FCA rules.

• The FCA will be able to replace the rules on s176A for electronic documentation with rules that it makes. This is a significant issue for the industry that currently services agreements that could more properly be services using digital means. The FCA had previously been supportive of an express consent approach, but this is unlikely to give industry the flexibility it needs.

• Part of the justification for removal of the automatic sanctions is the ability of a consumer to raise a defence by claiming for loss using s138D of FSMA. Firms will want to think through how that might impact recoveries processes.

HMT will consider definitions and scope in its consultation at the end of the year.  This will need to consider whether the regime is retained for business lending (and which type of lending) and hire agreements.  It will also be likely to consider definitions that have caused inflexibility, such as the straight-jacket concepts of fixed sum vs running-account credit. It will also need to consider how to deal with anti-avoidance where there is a financial limit applicable (which multiple agreements was designed to resolve).

HMT appears to be less clearly decided on whether to remove the criminal offices in the CCA (relating the sale of credit to minors and doorstep sales of credit).  It states retaining them is contrary to legislative policy under FSMA and there is little evidence that they are used.  However, Government wants to continue to send a strong message out against these practices.  If the criminal sanctions are removed, it is expected the rules would be replicated in the FCA Handbook.

This will cover s75 rights, the definitions and scope in the CCA, how to enable technology to facilitate innovation, potentially looking at removing complexity in digital communications, electronic signatures and digital contracts. HMT is also keen to explore how reform of the CCA could facilitate and assist in the roll out of green finance products.

The Phase 2 consultation will give more direction to HMT’s thinking on transitional arrangements.  The Government does appear open to considering whether the repeal of sanctions might be applied retrospectively.  Although it doesn’t say that expressly, the consultation says that there will be consideration of whether existing consumer rights are substantively interfered with or whether it would impact the consumer protection customers would expect to get when the agreement was originated.  A customer does not enter into an agreement thinking it may be drafted with defects, so there does appear to be scope for arguments that suggest any repeal could apply to existing agreements.