Reform of the Consumer Credit Act 1974

The Consumer Credit Act 1974 (CCA) regulates a £200bn industry, including personal loans, credit cards, hire purchase and pawn-broking. The Treasury is consulting on the significant amendments, which have been summarised below. Stakeholders have until 17 March 2023 to respond.

Brexit

The CCA was last reformed in 2010 to implement the EU Consumer Credit Directive of 2008 (CCD1), which had considerable input from the UK.

Supervision of the CCA transferred from the Office of Fair Trading to the Financial Conduct Authority (FCA) in 2014, bringing consumer credit, hire agreements and related activities under the Financial Services and Markets Act 2000 (FSMA), the FSMA (Regulated Activities) Order 20012 (RAO); and FCA’s rules.

The UK also participated in the review of CCD1 in 2014, culminating in a new draft consumer credit directive in June 2022 (CCD2), so the new CCA reforms seem likely to align with CCD2.

Scope of CCA

“Credit” under the CCA “includes a cash loan, and any other form of financial accommodation” – basically, any arrangement where a customer is given time to pay an amount that they would otherwise have had to pay immediately. Whilst exclusions apply, even “exempt agreements” and “non-commercial agreements” are regulated to some degree.

“Consumer” means any individual, partnerships of up to three people, or unincorporated associations of people.

Broadly, the activities of entering into regulated credit and hire agreements require FCA authorisation and specific permission when carried on by way of business, as do the activities of exercising the rights of a lender (or owner, for hire purposes) and various ‘ancillary services’ such as credit broking, debt collection, debt counselling, debt adjusting, debt administration, operating an electronic system in relation to lending and credit information services. Advertising credit and hire products is also regulated, even for unauthorised firms.

About 6,000 authorised firms have permission to enter into consumer credit or consumer hire agreements; and 36,000 FCA firms have credit permissions (mainly credit broking).

Parallel Reforms

The government has also announced plans to regulate many Buy-Now Pay-Later (BNPL) products that are currently unregulated by virtue of a specific exemption in the RAO.

The FCA’s new Consumer Duty changes the context in which the CCA protections will operate; and authorised firms can be liable for the activities of unauthorised firms.

Summary of Proposed CCA Reforms

Definitions

Some CCA concepts and distinctions have become uncertain or blurred over time and need clarification (e.g. what is meant by ‘enforceable’ and ‘enforcement’).

Scope

The scope of the CCA may need to change. For instance:

• the CCA covers some businesses but does not apply to companies, limited liability partnerships or (subject to conditions) where the amount exceeds £25,000 for business purposes, meaning smaller loans are not available; and
• the ‘unfairness’ provisions do not apply to consumer hire.

Information Requirements

The government wants to move “almost all” the CCA information requirements to FCA rules, which may mean extending the FCA’s enforcement powers and sanctions.

Form and content of information

Some highly technical ‘form and content’ requirements might be replaced by simpler requirements (e.g. to use “plain and intelligible language”), so that firms can tailor communications to specific types of consumers and outcomes.

Strict CCA time limits and triggers differ depending on the type of credit or hire. This may confuse both staff and customers (e.g. ‘running-account’ credit cards vs many small ‘fixed sum’ BNPL agreements with different end dates). Half of new credit card agreements are applied for via digital devices rather than on paper or computer screens; and the Consumer Duty will focus on outcomes.

CCA and Non-CCA Rights and Protection

The CCA provides rights and protection that cannot currently be replicated in FCA rules, such as:

• Section 75 liability: credit providers can be jointly and severally liable with a supplier for misrepresentations or breaches of sale contracts financed by credit agreements. This protection is lost where an intermediary breaks the link between supplier and customer (which should not be possible under card scheme rules).
• Section 56 agency: a lender is liable for the actions of a broker in certain negotiations with a customer.
• Section 94: Early repayment: Consumers can pay debts ahead of schedule and receive a rebate of interest.
• Section 93: Interest on default: A creditor cannot increase the rate of interest on arrears (a common right in commercial finance agreements).
• Time orders: a court can amend a credit agreement to alter the amount of time required to pay arrears, for example, and reduce the rate of interest. Time orders are usually made when a lender applies to enforce an agreement through the court, rather than by the borrower suing first.
• Voluntary termination (99/100): customers can terminate hire-purchase or conditional sale agreements once they have paid 50% of the total price and any arrears. This is most common in car finance, where there may be an imbalance between the value of the vehicle and the amount payable. The government may limit this right to customers in financial difficulty, so it does not increase prices and interest rates generally.
• Unfair relationships (140A-140C): the court has extensive powers where it finds the relationship between the creditor and consumer to be ‘unfair’. This extends to unregulated credit agreements, related agreements, associates, and unauthorised credit providers. Unlike the Financial Ombudsman Service (FOS), the court can consider all matters it thinks relevant before or after the making of the credit agreement; and has wider powers, even if the credit relationship has come to an end and) to grant orders when an agreement is being enforced.

CCA protection is also supported by court precedents that may be lost if provisions are moved or replaced.

Non-CCA protection includes:

• redress through FOS;
• unfair contract provisions under the Consumer Rights Act 2015 (not for business customers);
• court orders under the Consumer Protection from Unfair Trading Regulations 2008;
• a private right of action under FSMA (but this is expensive and limited remedies are available); and
• the FCA Consumer Duty.

The Treasury is keen to understand the risks and benefits of extending the FCA’s rules and powers to cover these rights and protections; and any gaps that should be closed.

Sanctions for breach

The CCA includes strict sanctions for non-compliance:

• Unenforceability: agreements could be automatically unenforceable without a court order or while the credit provider is in breach, e.g. where an agreement is improperly signed or annual statements or notices of arrears have not been issued;
• Criminal offences: generally, the FCA considers that the CCA’s criminal offences are not needed, given FSMA powers and remedies, except where individuals are not engaged in regulated activity by way of business or removing the offence may remove a deterrent effect.
• Disentitlement to interest and default sums: consumers may not be liable to pay interest or default charges that accrue while a credit provider is non-compliant;
• Breach of statutory duties.

The FCA might be given the power to apply unenforceability as a sanction for breach of some of its rules, raising questions as to which breaches and why.

Consumer Hire

Consumer hire is treated differently to credit under both the CCA and FCA rules. There is no right to terminate a hire agreement until 18 months after it is agreed and only where the amount payable does not exceed £1,500. The unfairness provisions under section 140A-C do not apply, nor do the FCA’s creditworthiness rules or rent-to-own price caps and other protections for cars or similar goods financed under similar credit agreements.

Small agreements

The CCA removes the following protections for credit not exceeding £50 (‘small agreements’), other than a hire-purchase or conditional sale:

• pre-contractual negotiations by or on behalf of a lender;
• form and content of agreements;
• statements and notices of arrears and default sums;
• pre-contractual explanations; and
• creditworthiness assessments.

Ironically, the regulation of interest-free BNPL agreements would mean that small interest-bearing credit agreements would still enjoy these exceptions, so they may be reconsidered for all types of credit.

Islamic Finance

‘Islamic finance’ or ‘Sharia-compliant finance’ is based on the belief that money is just a medium of exchange and has no intrinsic value so should not attract interest, for example. Yet the CCA requires an interest rate to be stated in a credit agreement. This and other provisions mean that some products are not available in the UK. The government is considering how to accommodate them with the same protections and in a way that allows comparison.

Equality

CCA reform may impact people with protected characteristics, in which case the government wants to hear how any disproportionate impacts could be mitigated.

When assessing this, the government must:

• eliminate discrimination, harassment, victimisation and other conduct prohibited by the Equality Act 2010;
• advance equality of opportunity between people who share relevant protected characteristic(s) and those who do not; and
• foster good relations between persons who share relevant protected characteristic(s) and those who do not.

Net zero

CCA reform could remove any barriers that prevent lenders from financing renewable energy solutions, such as electric vehicles, chargers and charging points, solar panels and air source heat pumps.

If you have any queries about the Consumer Credit Act 1974 proposals, please contact Simon Deane-Johns.