Consumer Credit Act reform: Consultation published

Timing and next steps

First, a quick word on timing. The government recognises that the Act is complex and that work to review it needs careful consideration. It expects the Consumer Credit Act reform process to take several years. This consultation is described as the first major milestone in that process. Following stakeholder feedback, we can expect more detailed proposals in a second stage consultation. The FCA will also consult on its approach to any new rules. It’s expected that final implementation will need legislation. This will be introduced when parliamentary time allows.

While the reform itself is not imminent, businesses have an opportunity going forwards to help shape the future regulatory framework in the most significant overhaul of the current legislation in almost 50 years. Stakeholders are encouraged to consider and respond to the consultation. The questions begin on page 24. Please contact Jeanette if you need any advice or assistance.

It’s important to stress that the government is not making specific policy proposals at this stage. The consultation is a way for it to deepen its understanding in relation to particular areas, and in some cases to provide examples of a potential approach.

What’s behind the Consumer Credit Act reform?

The government committed to wholesale reform back in June, when it announced its intention to: modernise and streamline consumer credit laws; cut costs for businesses; and simplify rules for consumers. One consideration is removing barriers to lenders wanting to offer new ‘green’ products to help the UK meet its net zero target.

The consultation paper explains that the way consumers interact with credit products has evolved significantly. Many of today’s innovative products simply didn’t exist when the Consumer Credit Act was passed in 1974. The Act has been amended over time and parts have been transferred out of legislation and into the FCA’s more agile regulatory framework. Add to this implementation of various EU directives, and the government says the system has become fragmented and too complex, restricting optimal outcomes for both consumers and businesses. Brexit and regulatory changes such as the introduction of the FCA’s new Consumer Duty are also contributing factors behind the push for reform.

The aim is to move the majority of the Consumer Credit Act from statute to FCA rules, recasting the provisions as appropriate. Where it’s not possible or desirable to move provisions to FCA rules, they will stay in legislation and be modified/refined as necessary.

Principles underpinning Consumer Credit Act reform

The government has developed five principles that will be used throughout the reform process:

• Proportionate. Balancing appropriate levels of consumer protection with proportionate burdens on business.

• Aligned. Aligning reform with implementation of the post-Brexit Future Regulatory Framework, and complementing and supporting the FCA’s Consumer Duty requirements. Making sure consumer credit regulation broadly aligns with the style and substance of current financial services regulation, and wider duties and obligations. A tailored approach may be required in specific areas.

• Forward-looking. Changes made now should be adaptable to future ways of delivering credit and consumer hire, and to the changing needs of consumers and businesses in the future.

• Deliverable. Designing reform to be deliverable for the regulators and industry. Recognising that significant change may be needed to internal processes and making sure that enough time is given for changes to take effect.

• Simplifying. Simplifying and modernising ambiguous technical terms to make consumer protections clear, and to make it easier for firms to communicate them and comply with requirements.

Responding to the consultation

Chapter 4 of the consultation paper sets out the government’s approach to reform under the following categories:

• Consumer Credit Act definitions (reform may need to consider whether certain key terms should be defined or have their existing definitions clarified);

• The Act’s scope;

• Information requirements (the government believes there is clear rationale for moving almost all these provisions into the remit of FCA rules, making regulation more dynamic and futureproof);

• Rights and protections (the government believes there is a good case for amending the FCA’s rule-making power to allow the rules to replicate the effect of current rights and protections); and

• Sanctions (includes government possibly exploring the option of amending rule-making powers to allow unenforceability to apply to breaches of FCA rules in a similar way to the Act).

In relation to rights and protections, there are some more specific questions around: time orders; the right to voluntary terminations; and unfair relationships provisions. There are also questions on consumer hire and on small agreements.

Chapter 5 of the consultation paper sets out questions in relation to financial inclusion and equality.

How we can help

Our team of specialists are market leaders in consumer finance. If you have any questions about the Consumer Credit Act reform, or any of the wider Edinburgh Reforms, please contact Jeanette or your usual WM contact. We will continue to monitor and report on the reform proposals as they develop.