FCA: most consumer credit protections should be retained in law

However, credit providers can look forward to more streamlined requirements on information to be provided to consumer borrowers if recommendations made by the FCA are implemented by the UK government, an expert in financial services regulation has said. It appears likely that self-regulation will continue to play an important part of the statutory regime, with the FCA emphasising the need to maintain the sanctions for breach of many requirements to ensure the consumer protection objectives of the CCA are upheld.

The FCA's recommendations were outlined in a report to Treasury that it was obliged by law to submit.

The FCA became responsible for the regulation of consumer credit in the UK in April 2014 and at that time some of the provisions of the CCA were repealed and replaced by FCA rules, principally in the consumer credit sourcebook chapter of the FCA Handbook. However, the FCA was required to review the remaining provisions in the CCA and set out its views on whether the repeal of those provisions would adversely affect the consumer protection objectives of the CCA, or whether it was preferable to replace them with rules and adopt a more principles-based, outcomes focused approach to regulation. It has now done so in its report to the Treasury.

Rights and protections, information requirements and sanctions provided for under the CCA were all considered by the FCA in its report.

Despite the anticipated wait, the report is likely to have disappointed many in the consumer credit industry. Lauren McCarthy of Pinsent Masons, the law firm behind Out-Law.com, said: "Despite strong industry support for consumer credit reform, it seems that an overhaul of the CCA will be unlikely without further consultation, stakeholder engagement and a desire from Treasury to move beyond the proposals put forward by the FCA." 

"Although the FCA indicated that some further thinking on various provisions is needed – for example, in relation to connected lender liability under section 75 of the CCA and provisions relating to termination rights – it remains unclear exactly what reform would look like, and when it is likely to be delivered," she said.

On rights and protections the FCA has reaffirmed a view expressed in its interim report that most of the rights and protections for consumers under the CCA are important and need to be retained in some form, particularly given the profile of consumer credit products. The FCA identified some examples where existing CCA provisions could be converted into FCA rules, including the potential to merge the right to a refund of credit brokerage fees into with existing FCA rules and guidance on credit broker fees. However, it said the majority of the CCA's rights and protections "could not be repealed without adversely affecting the appropriate degree of consumer protection". This because, it said, "it would not be possible to replicate the same level of protection under the FCA’s current rule-making powers".

The FCA said, though, that "more detailed consideration" is needed to "ensure that the provisions continue to provide an appropriate level of consumer protection without imposing disproportionate burdens on firms".

The FCA's view on the information requirements set out in the CCA is that they still "provide important consumer protection". However, it said that "most of the substantive information disclosure obligations in the CCA and its regulations … could, in principle, be replaced by FCA rules", with those rules being more "principles-based and outcomes focused".

If the disclosure provisions were converted into FCA rules, however, those rules would need to be backed up by appropriate sanctions for non-compliance, it said.

"An option would be to replace the information disclosure obligations with FCA rules, with the related provisions that provide for the civil consequence of non-compliance with these obligations being retained in the CCA or other legislation," the FCA said. "There would need to be consequential changes to those provisions to apply them to breaches of FCA rules.  We recognise that this may require primary legislation...," it said.

Financial regulation expert Andrew Barber of Pinsent Masons said: "The FCA's recommendation to move the information requirements into FCA rules should be welcomed. The change will assist firms and allow the FCA to respond to emerging issues. However, it is a lost opportunity in it not addressing the impact that the existing sanctions for non-compliance have."

"Currently some minor breaches, often with no discernible customer detriment, can have a disproportionately severe impact on firms. It would have been helpful for the FCA to address that imbalance in its report, with a proposal for a more proportionate approach like that in the mortgage market," he said.

On the CCA's sanctions, the FCA said the sanctions of unenforceability and disentitlement should be retained, but it said the criminal offences could be repealed given regulatory provisions contained in the more recent Financial Services Market Act. It further suggested that the focus of sanctions under the CCA could be adjusted and that further clarifications could be made.

The regulator said: "We recognise that the underlying CCA obligations can be complex and may be open to more than one interpretation. As such, we can see some force in the argument that the application of the current sanctions can raise difficulties, and may be disproportionate in some cases. This applies particularly to disentitlement to interest and default sums. Our view is that, in principle, the scope of application of the sanctions should be focused on breaches which are likely to cause material harm to consumers, particularly the more vulnerable or those in financial difficulties."

"We also see merit in clarifying the meaning of unenforceability so that firms are certain about the steps they can take where an agreement is unenforceable, and there is greater clarity for consumers as to the level of protection they have," it said.

It will now be up to the government whether to retain the provisions of the CCA or replace them in FCA rules and guidance.