The UK government has made a commitment to reforming the Consumer Credit Act (CCA). The CCA governs the laws around consumer credit or hire and lending by companies. The aim of the reforms is to simplify the rules around financial products such as credit card purchases and personal loans for consumers while reducing the associated costs for businesses. In addition to supporting consumer protections, the government hopes to promote growth and innovation in the sector as well as increase the accessibility of credit products.
Following a consultation that began in December 2022 and finished at the end of March 2023, we take a look at what these reforms mean for consumers and businesses.
What Are the Proposed Reforms?
One of the major proposals is to move the majority of the terms in the Act from statute so that it falls under the Financial Conduct Authority (FCA). The Consumer Credit Act became law in 1974 and has become inefficient and costly for companies that must implement the requirements in such a fast-changing sector. Other reforms include changing the scope of the legislation to include lending by limited liability companies, consumer hire rules, small agreements, equality, and Islamic Finance.
By bringing the rules under the FCA, the government is hoping to be able to respond better to an ever-changing sector quicker than it is able to do so now. This is because it’s much easier to change regulations under the FCA than amend legal statutes. It also aims to simplify the language used in credit products, increase protections for consumers and reduce costs and complicated and confusing rules for businesses.
What Are the Effects on Consumers?
For consumers, the proposed reforms should mean more protection when accessing credit products as well as clearer language that is easier to understand. For instance, making sure that the information received throughout the lending process is clear to the consumer and both screen and print-friendly. There are also many rights and protections in the Consumer Credit Act that the government is looking to replicate within the FCA through the proposed amendments. All in all, the government is being guided by the five principles it set at the beginning of the process.
The first of these is finding a proportionate balance between providing consumer protections, particularly for vulnerable customers, and the burden of costs to businesses. Next, despite the reforms, the goal is to keep the rules aligned with the ones in force today.
This goal is to make the FCA future facing so that it is flexible enough to meet the needs of an ever-changing consumer credit and hire landscape. This should benefit consumers as new financial products such as digital and cryptocurrencies come onto the market.
An important goal of the proposals is to make sure ambiguous technical terms found in the CCA are modernized and simplified, making it easier for consumers to understand contracts and lending or hire agreements. For instance, the government highlighted that unfair relationship provisions (sections 140A – 140C) which establish whether a relationship between a creditor and consumer is unfair is an area that needs to be reviewed.
More Choice and Better Protections
More broadly, the government hopes that the proposal will encourage innovation in the credit sector and widen the availability and accessibility of credit services. For example, under the CCA some Islamic financial products are not available because parts of the Act contradict Sharia Law which forbids earning interest. The new proposals aim to modernise the rules and remove such conflicts so that more Islamic financial products are available on the market for example.