Whilst originally a comprehensive piece of legislation, numerous changes have been made over the years; there are now various pieces of secondary legislation, and ever since 2014, there has been a transfer of various CCA provisions to the rules and guidance for firms in the FCA's Consumer Credit Sourcebook (CONC). With this lack of consolidation, it is easy to see how the consumer credit framework can be described as fragmented, incredibly complex, and very difficult to navigate. It has also been criticised for being outdated as it represents an older ‘rules-first’ approach, contrasting with the more outcomes-focused regulation we are seeing today (such as in the FCA’s incoming Consumer Duty rules).
Proposed reforms
Against this landscape, in June 2022 the UK government announced its intention to address these concerns by undertaking a full-scale reform of the CCA, and since then HM Treasury has now issued its initial consultation following on this commitment.
The main objective is to move the majority of the CCA regime from legislation to FCA rules, and in doing so, ensure that the rules are reframed to follow an outcomes-based approach, rather than the prescriptive model we have today.
The principles underpinning CCA reform are as follows:
- Proportionate – reform will ensure that levels of consumer protection are appropriate.
- Aligned – reform will ensure that the framework aligns with the style and substance of current financial services regulation.
- Forward-looking – reform will be mindful that changes should be adaptable to future ways of delivering credit to consumers.
- Deliverable – reform will be designed to be deliverable within an adequate timeframe.
- Simplified – the new regulatory regime will modernise and simplify ambiguous technical terms used in the CCA, to make it clear and accessible to consumers and firms alike.
Ultimately, through the planned reforms HM Treasury are hoping to facilitate innovation by increasing the accessibility of the regime, therefore helping grow the UK economy.
What can we expect to change?
As one may expect, the government’s proposals are ambitious, and given the size of the task it will understandably take many years to implement. Propositions are wide-ranging, with the consultation asking for views to be submitted on issues such as redefining the concept of “consumer credit”, to the possibility of eliminating criminal sanctions for non-compliance.
One particular thing to note however, is that the consultation has also asked for views on whether the information requirements as set out under the CCA could be overhauled. The current regime, again, is quite prescriptive in this regard. It requires firms to provide consumers with specific, detailed information before and after a consumer credit agreement is entered into, and secondary legislation sets out the details that need to be included (usually in the form of paper mailings). The consultation recognises the fact that information requirements now need to reflect technological and societal change, and in that regard, we can perhaps expect the following considerations to impact the review:
1. Environmental Social Governance (ESG): the default position under current legislation is that paper copies of the prescribed information should be sent out by post. It is only if the consumer expressly agrees that the information can be transmitted to them electronically that the information can be sent in digital form.
We are however seeing that consumer attitudes towards financial services are changing – consumers are increasingly sensitive to the question of environmental health, and so they will be looking for their financial service providers to be accountable when it comes to ESG. One of the ways in which this can be achieved is by going paperless, and switching to digital communications. It is arguable that reform is a chance to make digital communications the default rather than the exception, especially when we are now used to accessing rapid, internet-based financial services through smartphones.
2. Consumer Understanding: under this key outcome of the FCA’s incoming Consumer Duty principle[1] firms are required to provide consumers with the information they need, at the right time, and in a clear and understandable format. Importantly, the information must enable the consumer to make an informed decision as to the credit agreement, and overall lead to securing a good outcome for the consumer.
Against this backdrop, it can perhaps be questioned whether the current CCA legislation is perhaps overbearing in terms of the required disclosures that need to be made to a consumer, leading to an overload of information. For instance, pre-contractual disclosures need to include both pre-contractual credit information as mandated by the CCA, but also the adequate explanation information under CONC. Such duplication can make information disclosures long and burdensome for both the firm and the consumer, increasing the risk that the consumer will simply ignore communications, and ultimately fail to make an informed decision. There is therefore a clear rationale to simplify information requirements as they are moved from the CCA to FCA rules, replacing the current prescriptive model with a more flexible principles-based approach (such as requiring firms to tailor pre-contractual disclosures to the consumer’s individual circumstances, and the product at hand, rather than a set template of information).
It is still very early days, and much is yet to be seen on how the reforms will be carried out. Nevertheless, news of reform is a welcome change – an overhaul of the system has been long overdue, and if done right, will create a positive fundamental shift in how consumer credit is regulated.
[1] Whilst Consumer Duty is a principle of the FCA, and so is separate from the remit of HM Treasury (who are leading on the CCA’s reform), its impact will be wide-ranging and will therefore provide an important backdrop to the review of CCA.
