The reformation of the Consumer Credit Act

In December, His Majesty’s Treasury (HMT) released its consultation paper in relation to the long overdue reformation of the Consumer Credit Act (CCA) 1974. 

I think it is safe to say that since 2014, when the FCA took over most of the provisions in the Act, it has been a challenge for many credit firms. This is largely due to the fact that some rules sit in the FCA’s CONC handbook while others remain in the original legislation, which created a double-checking process for firms to ascertain whether a specific issue was either legal or regulatory. So as an industry, it is, in principle, a welcome relief that change is on its way and the HMT’s intention is that a simplified regime will be delivered.

Whilst it is well published and expected that most Buy Now Pay Later (BNPL) Interest-Free credit will be coming under FCA regulation soon, there are some questions being posed by HMT that could significantly widen the regulatory wingspan of the FCA for credit firms.

This consultation document has been developed following significant engagement with consumer groups and industry representatives. The purpose of publishing this consultation document was to enable interested stakeholders to make further representations on the scope and form of CCA reform. Responses are invited by 17 March 2023 and should be sent to [email protected]. Responses will be shared with the FCA unless otherwise requested.

I have not covered all proposals in this article, but I have included the key areas of the proposed reform, with some thoughts on what this could mean for the future of Consumer Credit.

Removal of Prescriptive formats of key documents

The reform aims to remove the prescribed formats of documents such as the Pre-Contract Credit Information, Adequate Explanations, and Arrears letters, which I think the industry will welcome. This means that firms will be given more freedom in deciding how they present information to ensure they stay. However, with this autonomy comes responsibility, which will inevitably lead to some firms being challenged by the regulator as to whether their chosen approach is suitable and meets the FCA’s expectations, which are continually evolving as the Consumer Duty is implemented.

There is obviously good reason for these changes, in that it is recognised that multiple long-winded and difficult to understand documents get very little attention given by most customers in their journey. There is also the challenge of how best to present this information in mobile and other digital device formats to best meet the information needs of the customer.

So, all in all, a positive step forward but with a clear need for guidance from the FCA given the role these documents might have in possible enforcement action later down the line.

Review and movement of retained provisions

Most will be aware that there are a number of provisions that have been retained within the Act. The commonly used areas of this include Sections 56 & 75 which will need reviewing and there is still a concern as to how and if these provisions can be moved across. Again, this is in theory a positive and welcomed move to simplify regulation. However, it will require significant consideration to avoid unintended consequences and ensure a common sense approach is taken to keep regulation proportionate.  

The current exemption in place for small agreements (s.17) relates to agreements less than £50; a value which has not changed since 1983. The consultation proposes to review its decision to remove the exemption to capture more BNPL agreements. As an example, should I really be afforded more consumer protection because I chose to spread the cost of a £40 pair of shoes across 4 monthly payments of £10? The jury is still out on the regulation of low-value BNPL agreements. A common-sense approach to prevent abuse of the product is preferable, not a wholesale change in regulation to protect the 5-10% who are currently able to misuse the product.

Review of Business Use Exemption

The consultation has the potential to cause significant changes in this area, given the openness of the request for comments on whether the exemption should remain. If amendments are made, this could result in a lot more business-to-business lending falling under FCA regulation or alternatively, and more preferably, an opportunity to remove the £25k floor for sole traders and small partnerships who are often encouraged to borrow above £25k by some brokers to avoid being captured by regulation. In this space where the borrower does not meet the FCA definition of a retail customer, should additional protections be granted to a sole trader that borrows £24k instead of £25k when wholly for business purpose? Some careful consideration is needed by HMT before amending this exemption, as this could widen the regulatory perimeter.

Potential increase on Consumer Hire creditworthiness assessment

Currently, the area of the FCA handbook focussed on creditworthiness assessments (CONC 5.2A) does not apply to consumer hire agreements. As such, in theory at least, taking out a Personal Contract Hire (PCH) agreement for a car has fewer checks completed on the hirer than would be the case of someone buying the vehicle and taking out a Hire Purchase (HP) or Personal Contract Purchase (PCP) agreement.

It is easy to think this was a big miss when moving across to the FCA, that such large personal commitments would not require affordability checks to be completed, and again in 2018 when CONC 5 was updated this was not revisited. I suppose the view may have been that as a consumer has no investment in achieving ownership of an asset, the customer is less likely to suffer detriment where an asset must be returned mid-agreement.

However, in reality, hire companies have, for the past eight years of FCA regulation, taken a common sense balanced business risk approach to decisioning and will often require income and expenditure declarations to be given as well as the completion of credit scoring. The missing piece of the jigsaw is clear data to confirm whether early default rates are significantly higher on hire agreements than credit agreements, where this can be attributed to poor creditworthiness assessments. I am not convinced there will be which raises two questions…

1. Firstly, is it proportionate to increase the cost and burden of regulation for hire agreements where the benefit is unclear?

2. Secondly, if there is no significant difference in the early default rates, is there merit in finding a happy median and reducing the rigour of creditworthiness assessments for credit agreements?

As someone who worked for a lender who made significant changes to its affordability checking in the sub-prime market, the impact of a more “robust assessment” was minimal on arrears, given that these were often caused by unforeseen changes in affordability months after the assessment took place.

Thinking two steps ahead, this could also result in hire becoming a full permission activity both for owners and brokers given that the regulatory view is that there is very little difference in risk between the two. This could then have a knock-on effect on the SMCR arrangements for firms, reporting requirements, and fees.

In conclusion then,

Whether you agree or disagree with my comments, this is a once in a generation opportunity for industry to affect the future of consumer credit regulation. Therefore, I would encourage the whole credit & hire industry to take time to consider the impact of changes and accordingly at this stage, before the reigns are handed to the FCA.