The year is 1974. Inflation threatens to spiral out of control, it reaches 11.3% in the US and 17.2% in the UK as a global recession looms. A major US lender – Franklin National Bank – is declared insolvent and governments debate the use of nuclear energy to combat rising oil prices and uncertain supply. Proof – if ever it were needed – that whilst history might not repeat itself, it certainly does echo.
1974 also saw the UK introduce the Consumer Credit Act (CCA) with the aim of regulating the sector and providing greater borrower protection. Imagine purchasing a car in the mid-seventies. The ensuant years will see that vehicles undergo rounds of successive part changes and repairs by a series of different owners for various purposes. Consumer credit regulation is much the same and – just like with classic car maintenance – unpicking years of accumulated tinkering can be an expensive, arduous, and often tedious process. A complex series of spinning wheels within wheels.
Now, however, there is simply too much mileage on the clock, too few of the original parts are present and there is a near-universal acceptance that its best days are behind it. So, in June last year, the government announced its intention to reform the CCA. How did we get here, what exactly is at stake, and what can financial services firms expect from new legislation?
A classic of the era
The UK’s CCA was first introduced into the statute book nearly fifty years ago with the aim of regulating consumer credit and providing greater protection to borrowers. The Act came about in response to growing concerns that some unscrupulous lending practices were becoming increasingly prevalent in the 1960s and early 1970s.
Prior to the CCA, there was no comprehensive regulatory framework governing consumer credit in the UK. Lenders were largely free to set their own terms and conditions, which often included high-interest rates, hidden fees, and unfair contract terms. A pre-CCA world was more likely to leave consumers vulnerable to exploitation and abuse, particularly those from disadvantaged backgrounds who had limited access to credit.
The CCA’s introduction sought to address these issues by introducing a range of protections for consumers. Among other things, the Act requires lenders to provide clear and concise information about the cost of credit, including the interest rate and fees. It also set out rules around the content and format of credit agreements and sought to provide borrowers with a range of rights, including the right to cancel certain types of credit agreements.
The CCA regulates various forms of consumer credit, including credit cards, loans, and hire purchase agreements. However, the rise of digital lending and a greater innovation of financial products and services have created regulatory gaps that the CCA does not adequately address. Whilst the CCA has played a critical role in protecting consumers’ rights and ensuring fairer lending practices, it is now in need of significant changes to meet the challenges of the modern financial landscape.
The government has said that the existing regulatory landscape – which is made up of the CCA, subordinate legislation and FCA rules, and incorporates historic requirements under the EU Consumer Credit Directive – has become increasingly fragmented. It is “too complex and incoherent” as well as “costly for firms and difficult for consumers to understand”, and it “contains overlap that restricts optimal outcomes for consumers and business”. Whilst quite the set of declarations, the government should be praised for this acknowledgement and the NACFB hopes that such frank and honest introspection now forms a central tenet of the Act’s review, repositioning, and reform.
One of the key issues with the CCA is that it creates an uneven playing field between different types of financial service firms. The Act imposes a range of requirements and restrictions on lenders, but these obligations do not apply equally to all lenders. For example, banks – high street or otherwise – are not subject to the same level of regulation as other lenders, which has led to a disparity in the level of protection afforded to consumers. Furthermore, the CCA is not adequately equipped to address the challenges of the digital age. The rise of online lending platforms and other fintech solutions has created new regulatory gaps that the CCA does not effectively address. This has led to confusion and uncertainty for businesses and consumers alike.
Fundamentally, in its current form, the CCA does not adequately protect the interests of commercial borrowers. The Act’s provisions are primarily geared towards protecting consumers, but many small and medium-sized businesses do not fall under this category. As a result, businesses could still potentially be left more exposed to dishonest lending practices and hidden fees.
The road ahead
But what can the industry expect in terms of reform? So far, we know that changes will be implemented via primary legislation, which will be brought forward “when parliamentary time allows”. There is a clear desire for the regime to be moved predominantly from legislation into FCA handbook rules and guidance, on the basis that this will make it less cumbersome and more agile.
However, the government does not envisage simply lifting and shifting existing CCA provisions into FCA rules, instead, it intends to recast them entirely, taking the opportunity to update and modernise the law. It expects the result to largely fall under FCA rules, guidance and principles providing effective and high levels of protection that achieve similar ends to existing legislation, but in a way that is more flexible, adaptable, and future-proof. There have also been pledges to simplify ambiguous technical terms to make clear to consumers what protections they have – and make it easier and more cost-effective for businesses to comply with the regulation.
It should also be noted that the FCA’s 2019 Retained Provisions Report on whether the repeal of CCA provisions would adversely affect the appropriate degree of protection for consumers did not assess the impact of other forms of consumer protection that will or could be introduced, such as the Consumer Duty and changes to the FCA’s rule-making powers, nor did it consider the potential opportunities made available by leaving the EU.
The Consumer Duty does not fully replicate all aspects of consumer protection found in the CCA, which provides some protection for borrowers under unregulated products, criminal and redress sanctions, and unenforceability. However, the introduction of the Consumer Duty does mean that the context in which the CCA protections were originally written has significantly changed.
The government seems open to wholesale reform, including looking at whether the expansion of the FCA’s rule-making powers is possible or desirable to enable the transfer of provisions out of the CCA. In this context, it is mindful of both the Edinburgh reforms, which aim to empower financial regulators while enhancing their accountability and the underpinning Consumer Duty principles. Members of the National Association of Commercial Finance Brokers (NACFB) originated £45 billion of small business loans in 2022 alone. Legislative changes that in any way threaten to hinder this route to market are monitored by the Association carefully.
The nuances of intermediary-led business borrowing can be intricate, and the modern commercial broker has long since occupied a rare but privileged vantage point between borrower and lender. This position ensures the trade body is a uniquely well-placed authority to speak on the considerations and ramifications of any changes to the CCA. The Association will be watching developments to ensure that consideration of the full distribution chain found within commercial lending is taken before the engine powers up once more.
This article first appeared in the NACFB Commercial Broker magazine – April 2023 issue.