The Edinburgh Reforms and the future of consumer credit

Jeremy Hunt’s speech on 9th December heralds the (delayed) arrival of the anticipated reform of consumer credit in the UK…and much more. But will the fanfare live up to the industry’s expectations?

The financial services sector has faced unprecedented challenges over the last few years, particularly those involved in the provision of consumer credit. The sector continues to face macroeconomic challenges and customers continue to be pressured by the cost-of-living crisis, all of this against the backdrop of a global pandemic and fundamental regulatory form in the guise of the consumer duty.

At any other time, the sector would run towards reform of the Consumer Credit Act (and many other changes spotlighted in the Edinburgh Reforms), but for many the prospect of further driven change may leave them wondering how already stretched teams will respond.

This is however a critical point and reform is long overdue. Embracing and being involved in the change will help to guide the sector for many more years, with the prospect of less friction, greater customer satisfaction and lower acquisition costs…

Why now?

There is no doubt that the reform of the Consumer Credit Act is long overdue and for many parts of the market it is no longer fit for purpose.

The origins of this new consultation stem from the transfer of powers from the Office of Fair Trading to the FCA in 2014 and the Retained Provisions Review in 2019, which identified the complexity in transferring the remaining provisions of the CCA to the FCA. The COVID pandemic delayed the progress of the review, but this is now firmly on the government’s agenda.

As the consultation acknowledges, reform is necessary for lenders, intermediaries and consumers and is seen as a key driver for economic stimulation over the coming years.

The consultation is seeking views from all stakeholders on a package of reforms, which is likely to take several years to implement.

The consultation is now open and will close on 17th March 2023 and, following the closure, we expect to see packages of reform, proposed through further specific consultations and new regulation being brought forward.

What might change?

The consultation promises to seek alternatives which are proportionate; aligned (with the implementation of the Future Regulatory Framework); forward-looking; deliverable; and simplified.

The review acknowledges the complexity in simply transferring the remaining provision of the CCA to the FCA handbook and principles (hence why it hasn’t been done already). As such, there is a recognition that a reframing of existing regulation is likely to be required, including repeal and reform. This is with the defined aim of simplifying requirements for consumers.

The consultation seeks views on different aspects of the retained provisions, notably definitions, the scope of the CCA (including hire), various information requirements, rights and protections, and sanctions.

The consultation guides towards some of the current challenges encountered through the application of CCA and seeks views on how this may be managed in the future in particular through the increase of powers and oversight of the FCA.

We are familiar with some of the nuances that the CCA creates, such as in lending to small businesses. It is clear that the current rules impair the operation of lending to this important market, which is also recognised by lenders. We can expect the outcome of the consultation to point towards the opening of that market and for more consistent rules to be applied.

Another important aspect of the consultation relates to information requirements. Following BREXIT, the UK now has greater freedom to review aspects of the Consumer Credit Directive and reconsider information for the UK market alone, free from harmonisation requirements.

It seems both desirable and inevitable that there should be changes to the prescriptive nature of many aspects of the CCA (agreements, notices and information) to more customer centric and focussed communications; this is also consistent with the forthcoming consumer duty.

The failure to comply with formalities in the prescriptive nature of information requirements has led lenders to undertake remediation exercises, which bear no relevance to the actual or perceived harm to consumers. A realignment of the requirements should be welcomed by lenders, but it brings with it change and also a necessity to ensure communications are effective and meet the needs of consumers.

The industry has long reflected the imbalance of certain rights prescribed through the CCA, such as s75 liability and voluntary terminations (in particular) and the costs they place on lenders. There has already been a great deal of lobbying and research into these issues and the review and reform of these will be high on a package of reform.

In line with these proposed changes, there has to be a review of applicable sanctions for breaches. This will require substantive reform, with further primary legislation. We can expect changes to definitions, with these consolidating much of the existing case law and framing against the credit provision required today.

The consultation is a generational opportunity to bring forward regulation which continues to offer protection to consumers, but also modernises and reflects the way in which credit is provided and used in society.

We should welcome this opportunity to influence change and accept that whether or not this is the right time, it is time.

Find out more about the reforms and future of consumer credit at the forthcoming Asset Finance Connect webcast with Shoosmiths on 5th January. Sign up below!