DLA Piper UK LLP (DLA Piper) welcomes the Financial Conduct Authority's (FCA) engagement with the consumer credit industry and is supportive of not just the FCA's review of the Consumer Credit Act 1974 (CCA) retained provisions but also a broader review of the entire legislative and regulatory framework under which the UK consumer credit industry operates.
The CCA was first introduced in 1974 and over time has been revised and supplemented on a number of occasions. A comprehensive review of the whole legislative framework would provide a much needed opportunity to consolidate, modernise and simplify the fragmented and complex myriad of legislation that has evolved.
Any such review would also offer the opportunity to further align the UK's consumer credit framework with that of the European Union (EU) to provide a greater degree of harmonisation with the consumer credit legislation operating in other EU Member States. Doing so could assist lenders with developing their business and opportunities to provide credit services to borrowers across the EU. This would necessarily involve a significant simplification of the regime.
Many of the current CCA provisions were written over 40 years ago and were created to deal with specific market and societal issues arising at that particular point in time. Since the CCA was enacted the global financial landscape has changed immeasurably and society is continually evolving at a fast pace. Technological advances such as digital communication, ever changing consumer needs and consumer behaviour, are determining how lenders carry on business and how services are provided to their borrowers. The complexity of the consumer credit legislative framework, in particular the CCA, means that it can operate to hinder innovation and market development/growth.
As a result of the evolving market, prescriptive provisions of the CCA have become antiquated, some operating to provide borrower and lender outcomes that are both unhelpful and burdensome to both borrowers and lenders alike. Further, the application of certain CCA provisions may be complex and give rise to disproportionate and unjustly beneficial outcomes for borrowers. Such outcomes are not only disproportionate to the detriment/actual loss suffered/incurred by a borrower, but are also operationally and economically burdensome for lenders and were perhaps unintended by the legislators. When the CCA was introduced the Office of Fair Trading (OFT) was the regulator. The OFT had relatively limited powers and, against this background, the CCA included various sanctions which could operate against lenders for failure to comply with the legislation. The FCA has a large toolkit of measures which it can take so that the former sanctions are now out of date.
DLA Piper is supportive of a comprehensive review of not only the retained provisions of the CCA, but also of the legislative framework for consumer credit as a whole. We agree with the FCA’s stated aim for the review in that it should ‘simplify the regime where possible’. The introduction of a single, comprehensive rulebook similar to those applying to the mortgage market would be welcomed and could offer a more responsive/dynamic regulatory framework, capable of reflecting market changes on a more timely basis/efficiently. Incorporating as much of the retained provisions into CONC as is possible would be a good basis for the review.
As suggested by the FCA in its 'Call for Input', there is much merit in prioritising the revisions required. To assist with determining the prioritisation order for any proposed revisions, it could be helpful to consider the consequences of the application of each retained provision, in particular whether there is any significant or disproportionate detriment suffered by either the borrower or lender. Examples of provisions that could usefully be revised sooner rather than later include, amongst others, the CCA’s unenforceability provisions, simplification of the disclosure requirements for pre-contractual, post contractual information to borrowers and the mode of delivery of this information.
Q1: Do you agree that the review should focus on particular retained provisions?
We believe the review should be as comprehensive as possible and include the CCA, supplementary legislation and related regulations. As a significant proportion of the CCA provisions are intertwined with secondary legislation, it could be prudent to review them as a whole to see whether they can be consolidated into one set of FCA rules. This will assist with ensuring the new framework is consolidated, consistent and harmonised in so far as is possible with consumer credit regulation in the EU. Having one set of rules or a simplified legislative framework will benefit consumers and the industry, offering a more dynamic framework capable of adapting more efficiently to market developments.
Certain CCA provisions are outdated, complicated and burdensome and could usefully be aligned with the FCA’s rules in other sectors to promote some degree of consistency. Those provisions that cause a greater degree of detriment to borrowers or are disproportionately burdensome to lenders should be classified as having a high priority. We identify key provisions for revision below.
Consideration could be given as to the effectiveness of the current legislation for promoting innovation and market competitiveness. Customers' needs are constantly changing, as is the way by which they want services provided to them. Borrowers are increasingly wanting to apply for credit quickly, simply and on-line, using tablets and their mobile devices. The regulatory framework should support and facilitate innovation, where possible allowing for future proofing. With this in mind the current requirements on how agreements can be formed, their content, the requirement for signatures and the prominence of specific information could usefully be revised.
High priority revisions
Provision of information to the borrower (CCA ss 77A, 86B, 86C, 86E)
The CCA prescribes a range of statements, notices and other information which must be provided to borrowers, including those in arrears, at specific times, as well as their form and content. These include the annual statement, notice of sums in arrears, the notice of default sums. The danger with such prescriptive statutory requirements when combined with the draconian sanctions for breach is that a failure to comply with the smallest detail could render the agreement unenforceable and severely restrict the lender's ability to collect interest and default sums due.
The original reason why parliament felt it necessary to introduce these information requirements was that, previously, borrowers would not get any information during the lifetime of their agreement unless they specifically requested it. Parliament's intention can be satisfied with a far less prescriptive regime and without the dire sanctions for breach of the rules which, more often than not, have resulted in unexpected windfalls for borrowers who have suffered no detriment.
Overly prescriptive statutory requirements have a tendency to become fast outdated and can limit the ability of lenders to create 'smarter' communications tailored to the demands and needs of the borrowers. A less prescriptive approach would be more beneficial to both borrowers and lenders.
The CCA requires lenders to 'give' prescribed pre-contractual information in 'writing or other durable form' which must be able to be taken away. Similar provisions apply to the agreement and to any other information referred to in it. While it is straightforward for lenders to provide borrowers with information in a form that can be accessed from a secure website, or downloaded and/or printed, it is uncertain as to whether such practices will constitute 'giving' in accordance with the statutory definition. Such rigid requirements and a lack of clarity over their application are serving to frustrate borrowers, who may receive documentation in a format they do not want, and to frustrate the lender by not being able to provide a straightforward digital and paperless service.
Unenforceability for breach of regulations
Even minor breaches of various regulations made under the CCA, in particular the Consumer Credit (Disclosure of Information) Regulations 2010 and the Consumer Credit (Agreements) Regulations 2010 can render affected agreements "not properly executed" so that, if the lender has to enforce the agreement, it is necessary to obtain a court order before doing so.
The rules which have this effect are outdated and reflect a time when the OFT was the regulator for the consumer credit sector. More often than not, rather than providing meaningful consumer protection, these provisions are used by delinquent borrowers trying to escape their liability under the agreements they have entered into, or by claims management companies on their behalf. Now that the rules have been in place for some years, these agreements will have been entered into following meaningful assessments of affordability and creditworthiness.
Given the complexities inherent within the regulations referred to above, lenders will often find themselves with portfolios of agreements which could be open to challenge on highly technical grounds which are most unlikely to lead to any significant consumer detriment but which can make securitising or otherwise borrowing funds against those portfolios subject to time consuming legal due diligence exercises. Making raising funds against portfolios a more expensive and time consuming affair reduced the availability of funds to lenders and raises costs for borrowers.
Section 75 would benefit from an early review as the effects of this provision are burdensome both financially and operationally on lenders affected by it. The provision was drafted to provide protection to borrowers against defective goods and unscrupulous suppliers. At the time this provision was drafted the government believed that the lenders would be better placed to secure redress from the supplier but with the development of various accessible consumer dispute resolution mechanisms borrowers now have many avenues available to them to seek appropriate redress from the supplier.
Over time section 75 has tended to become misused by astute borrowers. One example of this is borrowers paying a very small proportion of the cost of goods using their credit card then bringing a claim against a lender for the full value of the goods. Further, borrowers will frequently pay for goods using a credit card but repay the full balance outstanding at the end of each month so that credit is effectively not being taken.
Borrowers who have purchased goods using a hire purchase or conditional sale agreement may utilise sections 99 and 100 of the CCA to terminate their agreement at any time on a voluntary basis. The effect of this is that the borrower must relinquish possession of the goods purchased and repay only half of the amount owed to the lender.
Sections 99 and 100 were introduced to provide protection to those borrowers who found themselves in financial difficulty at a time when the economy and the market for goods and services were very different than today. One example of the changed circumstances is the rate at which goods depreciate in value due to technological advances and this can adversely affect the operation of these sections for lenders because hirers are better handing goods back and walking away from their legal obligations to make the remaining repayments.
The costs which are met by lenders in dealing with these sections are significant and are ultimately reflected by lenders in higher credit prices for borrowers. Longer term revisions
UK consumer credit legislation is out of line both with most other consumer legislation and much of EU legislation in treating small businesses as consumers. There is little logic in the way in which the protections afforded by the legislation apply to some businesses and not to others which might happen to be incorporated bodies. The issue is significant because some lenders are actively avoiding lending to small businesses which have the protections of consumer credit legislation.
Further, there are some anomalies in the rules which apply to credit brokers who can be subject to the full FCA regime even though the lending can be exempt from regulation.
It would also be beneficial to clarify the meaning of credit in section 8 of the CCA as currently the definition is so wide that it can catch types of credit which was never intended to be subject to the CCA. One example of this is trade credit provided to small businesses falling into the definition of individual in the CCA for goods bought from manufacturers. While it is often possible for such credit to fall into one of the exemptions which is available, this is not always the case. We do not believe that it was ever the intention that credit such as this would be subject to the CCA and certainly not the case that the FCA would wish to regulate the many thousands of companies who provide it.
Modifying and multiple agreements
The rules relating to these agreements are notoriously complex and many lenders will try to avoid being caught up with them. There is some danger that the complexities lead to these rules sometimes being ignored or "worked around" which means they must be reconsidered.
For example, borrowers who are unable to meet their repayments under a CCA regulated agreement may seek to modify their payment terms. Such changes can only be effected via a modifying agreement which has effect as a new agreement, entirely replacing the old agreement. Failure to comply with the all of the CCA requirements in relation to this agreement will render the agreement unenforceable without a court order. The inability to adjust the payment terms simply leads to complexity and unnecessary bureaucracy, serving to only to confuse and upset borrowers in difficulty seeking a fast and straightforward solution.
Revisions could allow for greater flexibility to modify agreements in certain prescribed circumstances and to permit disclosure limited to the varied terms and their effect. This would offer a practical solution for borrowers and lenders alike while still ensuring adequate consumer protection.
While the current legislation permits a CCA agreement to be signed electronically, case law in this area limits the application of this due to much uncertainty over what constitutes a valid signature. Guidance could be issued in this area to provide clarity and to help facilitate innovation in the use of digital technology.
Q2: What should be the main criteria for prioritising provisions for review?
As noted above, we believe that all the retained provisions of the CCA will need to be considered as part of the review to enable an informed view to formed on which of them could be best incorporated as rules or guidance under FSMA, or revoked altogether.
To assist with determining a prioritisation order for the proposed revisions, it could be helpful to consider the complexity of the provision, the consequences of its application and whether its effect is to restrict or prohibit competition and innovation. In particular, consideration could be given as to whether there is any unfortunate application of the provision and/or any significant or disproportionate detriment suffered by either the borrower or lender. Those provisions that are considered to be unduly complex or burdensome to borrowers or lenders could be prioritised for revision sooner.
Q3: Are there particular provisions that you would include or exclude from reviewing, and why?
The response to Question 1 outlines those provisions which could be prioritised for revision as part of any review. We recognise that provisions introduced under the EU Consumer Credit Directive are unlikely to be open to review.
Q4: Do you agree that the review should not extend more broadly, other than where necessary?
We agree that the review should not extend more broadly other than where is necessary. However, to meet the objective stated in article 20 (SI 2014/366) and to ensure any new consumer credit regime is as robust and as future proofed as is possible, a full and proper review of all of the retained provisions, along with the several pieces of supplementary regulation is recommended.
Q5: Do you have any further thoughts on the scope of the review?
DLA Piper welcomes the FCA's proactive engagement with key industry stakeholders and is pleased that the FCA is taking the time to scope the review fully. The FCA's review of the retained CCA provisions provides an ideal opportunity to reform the unduly complex legislative framework to the benefit of consumers, lenders and the industry as a whole.
One of the particular challenges for the FCA is to forward proof any changes which are made. The current rules were written at a time when paper agreements were the norm whereas many borrowers today are keen to use iPhones and similar devices to enter into and run their agreements. Moreover, the attitude to taking credit today in our consumer society is completely different to what it was when the CCA was written, and shaping consumer attitudes is at least as important as any legislative changes.
Q6: Do you have any views on timescales for the review?
With three of the original five years remaining for the review, time is tight to conduct a comprehensive review of the CCA and its supplementary legislation. While it is important that reforms occur sooner rather than later, it is also important to ensure that they are not rushed and that all stakeholders have had adequate opportunity to feed into the consultation process.
Should the FCA restrict its review to the retained provisions of the CCA, one option could be to implement the proposals using a phased approach, with those provisions marked as high priority being implemented first. This approach could assist with adhering to the prescribed timeframe and with obviating the most ineffective and burdensome CCA provisions.
Q7: Are there particular provisions that you believe should be considered for earlier review, and why?
As discussed above there are certain provisions of the CCA that would benefit from a more timely review than others due to their complexity and detrimental effect. The provisions prioritised for rapid reform are stated above.
Q8: Do you have any views on the proposed conduct of the review and engagement with stakeholders?
39. DLA Piper supports the FCA's establishment of an expert stakeholder consultative group to provide external input into the review. The review will undoubtedly be an extensive and complex piece of work for which the FCA may require additional resources. DLA Piper would be pleased to assist the FCA in this regard.