The Edinburgh Reforms and the future of consumer credit in the UK
On 9th December, the Chancellor Jeremy Hunt introduced the Edinburgh Reforms, a package of 30 areas of reforms including a much-anticipated and long-awaited consultation on the 1974 Consumer Credit Act (CCA).
The package of reforms, not all affecting the asset and auto finance industries, builds on proposed and existing legislation and aligns with the Future Regulatory Framework in setting out the Treasury’s vision of the future financial services landscape. It is hoped that the Reforms will stimulate lending and growth in the UK, increase competition, and make the UK an international centre for overseas investment for financial services.
These generational reviews and reforms have been enabled because of the UK’s withdrawal from the EU, allowing greater flexibility and opportunity for change.
The financial services sector has faced unprecedented challenges over the last few years and continues to face macroeconomic challenges and customers continue to be pressured by the cost-of-living crisis. Such challenges have been faced 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 fully embrace the reform of the CCA, but for many the prospect of further change (especially after the recent introduction of the Consumer Duty guidelines) may leave them wondering how their already stretched teams will respond.
However, there is no doubt that the reform of the 1974 CCA is long overdue and for many parts of the market it is no longer fit for purpose for the diverse and demanding needs of customers and lenders in today’s market place.
The consultation and reform of the CCA will be a long process due to numerous areas covered in the Act which are clearly outdated against today’s society, economy, and financial services sector and products.
In the video below, Wayne Gibbard, Commercial Clients and Strategy at Shoosmiths provides an insight into the reform of the CCA and some specific areas related to the asset and auto finance industry.
The consultation is broken down into 30 questions, grouped around different categories, which are very wide in their nature and will require some considerable thought in responding to and also for the responses to be assimilated by the government; this is the central issue as to why reform has been difficult to achieve in the past.
The Consultation promises to seek alternatives which are proportionate; aligned (with the implementation of the Future Regulatory Framework); forward-looking; deliverable; and simplified.
In line with recent Consumer Duty guidelines, 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 focused communications.
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 requirements for the UK market alone, free from harmonisation requirements.
Issues raised relating to the asset and auto finance marketplace include:
1. Lending to small business – there are many nuances relating to this in the CCA, with current CCA rules impairing the operation of lending in this market which is an engine for growth. If the government’s objective is to further stimulate the economy, lending to SMEs and small business has to be central to that ambition. They could possibly remove the £25k cap and provide that all lending for business purposes is unregulated, as occurred during the COVID pandemic. The government have acknowledged that supporting SMEs is critical for the survival and growth of the economy.
2. Innovation and new product development (such as subscription type products) – access to credit and use of technology is increasing and the current CCA rules cannot keep pace with these changes causing friction in the customer journey. On balance and, given the acceleration of product development and technology, having less prescription must be desirable.
3. The transfer of rules to the Financial Conduct Authority (FCA) and their powers – link to Consumer Duty guidelines which set the foundations of what the future state may look like, along with the FCA’s likely approach to oversight and enforcement in respect of the duty. Having both the rigidity of prescription and then the Consumer Duty will cause potential conflicts in the delivery to customers. Some general guides or baseline requirements may reduce some of the risk for lenders, without creating prescription.
It is encouraging to note that the Treasury have specifically set aside consideration of the voluntary termination provisions of s.99 and s100 of the CCA.
With regulation and oversight constantly evolving since the implementation of the CCA in 1974, there are many questions about the applicability of voluntary terminations in the market place today and whether these offer any enhanced protection to vulnerable customers, or whether they are being adopted by consumers who do not really require the protection.
Wayne Gibbard believes that the removal of the right to voluntary termination, but preservation of some form of similar forbearance in CONC for vulnerable customers, may achieve a balance between this as a protection measure and balance for the lenders’ right.
Graham Wheeler, CEO of Advantage Finance sees that the biggest cost to businesses is currently voluntary terminations, which have been abused since the CCA was established. With Consumer Duty guidelines and changing rules, Wheeler strongly believes that “voluntary terminations rights are unworkable” and present a huge cost to lenders.
According to Graham Wheeler, a new set of rules are needed that the industry can work to as the current processes are unwieldy, with many consumers abusing the VT rights.
According to Shoosmiths’ Wayne Gibbard, the transfer of the remaining provisions of the CCA to FCA rules shouldn’t have any direct impact on commission itself. Commission disclosure rules are already set in CONC, requiring disclosure where it may affect the impartiality of the broker or where it could reasonably affect the decision of a customer if it were disclosed.
CONC also elaborates about the amount of commission to be paid (being commensurate with the cost of the transaction/activity being undertaken by the broker).
However, at the current time commission is constantly present in the background of the sector, particular in consideration of the customer understanding and price & value outcomes under Consumer Duty.
While commission disclosure may be a topic for further debate, in looking at the FCA’s previous reviews (in 2019 – Motor Finance Review), Consumer Duty and the current CMC activity, Wayne Gibbard sees that there is a compelling case for lenders to consider disclosure to the customer in line with practice in other market areas, such as insurance and mortgages. This is, of course, a big change, but one which the sector and individual lenders should form a view on by April, when they are required to provide information to distributors under Consumer Duty.
While the CCA reforms will be a long-term consultation and process, Advantage Finance’s Graham Wheeler sees commission disclosure reforms as much more imminent.
Regulated and unregulated business
There are many changes currently affecting the marketplace – commission disclosure, consumer duty, CCA reform – but will they bring regulated and unregulated business together? There will be a change, according to Shoosmiths’ Wayne Gibbard, as long as objectives to stimulate the economy are at the forefront of the government’s minds. While there won’t be a blurring of boundaries between regulated and unregulated business, Wayne Gibbard hopes that there will be clearer lines about business lending being excluded.
As highlighted in the video below, Wayne Gibbard is optimistic that the CCA reforms will clarify and simplify.
If we look at these markets in their purest forms, business and consumer, Wayne Gibbard would like to see the CCA keep them separate to allow for the needs of those customer bases to be served accordingly. Whilst there may be overlap across the marketplace, they clearly have different imperatives and require different outcomes. Trying to serve both these markets through one set of rules, on the face of it, doesn’t make sense.
As Wayne Gibbard notes below, we should strive to make the case that innovation will drive the economy and frictionless transactions with SMEs is a real enabler for growth.
Transfer of power to the FCA
The origins of this new consultation stem from the transfer of powers from the Office of Fair Trading to the FCA in 2014, when some provisions of the consumer credit act were transferred to the FCA rules, but this was limited in scope. Since then, there have been several reviews relating to consumer credit, including the Retained Provisions Review in 2019, which noted the complexity in transferring the remaining provisions of the CCA to the FCA.
The transfer of the remaining CCA rules to the FCA must be seen as a positive step for a number of reasons, according to Wayne Gibbard:
- Opportunity for lenders to have greater flexibility to serve their customers through the channels and information they deem necessary and customers require.
- FCA principle-based (not rules) approach is a good thing.
- The FCA have been clear that they want to stop the constant cycle of remediation activity and for cultures to change to support that. This has to be welcomed and we can already see a move towards this through consumer duty and the more collaborative approach.
However, this is a learning period for the asset and auto finance industry, from a lender and FCA perspective, with many years of learning to be done on both sides. Longer term, the consultative and collaborative approach of the FCA has to be better for lenders, consumers and the regulator.
In the future, Wayne Gibbard believes that we will see this transfer of power to the FCA as a positive move, but the journey between now and then will be difficult for all involved as we learn about the FCA’s appetite and sector view going forward.
While Graham Wheeler agrees with Wayne Gibbard’s view, he feels that “any move towards a single source of truth is a good thing for the industry” and that the best thing for the industry is a merger of the new CCA and consumer duty and FCA rule book to a new book of rules.
Role of FLA and other trade associations
In light of the increase in principles-based regulation, trade associations and similar bodies have a crucial role to play in setting the tone for a particular sector and providing some market interpretation. Industry guidance from these associations will be able to shine a light on particular market areas, e.g. motor finance, credit card, direct lending or broker introduced, and should give more confidence to lenders operating in these spaces.
Industry guidance is helpful and has a place in the market as the FCA look at these guidelines in their enforcement guidance or through their decision principles to assess the conduct of a firm. As Shoosmiths’ Wayne Gibbard notes, “there is definitely a place for well-crafted guidance.” This allow the niche and unique area of our market place to be explained and contextualised against general rules and guidelines which may be applicable to the financial services market as a whole.
As a director of the Finance & Leasing Association (FLA), Advantage Finance’s Graham Wheeler noted that the dialogue between the FLA and the FCA is already underway, with the FLA taking on an advisory role.
The consultation of the Edinburgh Reforms is now open and is seeking views from all stakeholders on a number of reforms including the CCA. The consultation closes on 17th March 2023 and it will be interesting to see what points will be raised that will affect the asset finance industry. Following the closure, we enter the realms of uncertainty but can expect to see packages of reform, proposed through further specific consultations and new regulation, being brought forward. However, the new CCA rules will likely take several years to implement.
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.
There remains a lot to consider and reflect upon before responding to the consultation, but this has to be something which the industry embraces. The generational opportunity to update and reform archaic and antiquated regulations and provide flexibility for new product innovation and changes for the future must be welcomed.