HM Treasury consultation – Reforming the Consumer Credit Act 1974

The Financial Inclusion Centre (FIC) made a submission to this very important consultation on the reform of the Consumer Credit Act 1974. FIC’s submission can be found here: FIC HMT Consumer Credit Act reform final copy

FIC very much supports the government’s overall aim to update the system of legislation and regulation relating to consumer credit. We agree with the general thrust of the government’s approach to move, where appropriate, core elements of consumer protection from legislation to regulation. We agree that regulation can be more flexible and agile than legislation. The Consumer Duty, if robustly supervised and enforced with enhanced regulatory transparency, could be very effective.[1]

However, there are some very important specific aspects of the consumer protection regime which should be left in legislation either because those aspects are not possible to replicate in regulation or the deterrence effect supplied by the threat of legal action. In other cases, it is very difficult to reach a firm conclusion without a full comparative analysis of the ‘before and after’ position for each of the important measures contained in the existing legislation.

In the case of certain measures, there is merit in implementing the intention of the consumer protection measure on an ongoing basis via FCA rules but retaining a legal backstop to protect the most vulnerable consumers in the most challenging circumstances. This would also act as a much needed deterrent for the consumer credit industry which history tells us has been a consistent source of consumer harm for the most vulnerable consumers.

Moreover, while the government recognises the need to make legislation and regulation more agile and responsive post Brexit, it does not appear to be proposing any significant changes in the general approach to enable regulators to take the initiative in response to financial ‘innovations’ which create risks for consumers.

For example, it is now two years since the Woollard Review recommended that buy now, pay later (BNPL) should be regulated by the FCA. Yet, it is only recently that the government has decided that this should be given the powers to regulate BNPL.

However, the consultation paper does not include proposals that would enable the FCA to use its initiative to quickly respond to future high risk innovations. The FCA would still have to wait for the government to decide whether to include any new product or activity within its remit. This is not optimal particularly with regards to markets such as consumer credit which are fast moving and where there has tended to be a high risk of consumer detriment.

The lack of agility is partly down to the historic approach adopted in the EU where legislation and regulation tended to be determined according to legal and corporate forms rather than consumer needs. The UK now has an opportunity to introduce more agile legislation and regulation.

FIC argues for an approach based on purpose-based regulation where financial products and activities are presumed to fall within general categories based on their purpose. For example, any commercial activity, product, or agreement which advances a consumer the means to transact, and which is to be repaid either as in a lump sum or instalments (with or without fees/ charges), would be presumed to be consumer credit. Any new product or activity which facilitates an advance would be presumed to fall within the FCA’s remit with specific rules developed by the FCA using a fast track process. This approach would have caught BNPL.

Linked to this, UK financial regulation has tended to be permissive, with policymakers and regulators intervening ex post after there is evidence of harm which cannot be ignored. See, for example, payday lending, rent to own, and BNPL. It would be much more efficient and effective if regulators were given the powers to apply a more precautionary approach to financial regulation, particularly if combined with the purpose based definition approach outlined above. It is much better that harm is prevented rather than continually clean up markets after the event. Ex ante regulation is more effective than ex post regulation.

Increasingly, there is a blurring of the lines between finance and technology, and finance, technology, and retail consumer markets (known as ‘embedded finance’). Yet, the intersection between these markets is poorly regulated. The FCA’s Consumer Duty measures are weak on this.[2] The proposals in this consultation paper do not adequately address the growing intersection risks either.

Finally, we are very concerned at the emphasis in the consultation paper given to supporting economic growth. The government is already mandating, in the Financial Services and Markets Bill (FSMB) that financial regulators should have a secondary growth and competitiveness objective. The FCA’s role is to protect consumers, not support economic growth and promote the competitiveness of the very industry it is meant to be protecting consumers from.

The recent emphasis on using financial regulation to support growth and competitiveness threatens to compromise regulatory independence. It is all too easy to envisage situations where regulators are put under pressure by industry lobbies to reduce consumer protection to make the industry more competitive[3] (or to stimulate lending to support economic growth.[4] The FCA should be able to concentrate on protecting consumers, this reform of the CCA should focus on enhancing the consumer protection regime.

[1] See: FCA consultation on a new Consumer Duty | The Financial Inclusion Centre

[2] See: FCA consultation on a new Consumer Duty | The Financial Inclusion Centre

[3] Based on disingenuous arguments that regulation is stifling innovation and/ or imposing unnecessary costs

[4] Reducing regulations might well encourage growth in consumer credit but this would be a false economy as it would be likely to just encourage the selling of unfair, unaffordable, and unsustainable lending.