HM Treasury consulted on the first phase of its proposals for reform of the Consumer Credit Act (CCA).
The Government is proposing to move CCA information provisions into FCA rules and remove or update a number of sanctions and consumer rights, and consulted on the timetable and process for reform.
The majority of StepChange clients have consumer credit debts and our research highlights the harm that problem debt can cause and its roots for many clients in the conduct and practices of consumer credit firms. Effective regulation of consumer credit is vital to reduce vulnerability to problem debt and the harm that problem debt causes.
The Financial Conduct Authority (FCA) has made good progress since taking responsibility for consumer credit regulation, but some longstanding entrenched problems remain. We welcome the introduction of the Consumer Duty as a powerful tool to address consumer detriment in the credit market, but we strongly support retaining key CCA rights and protections to avoid a reduction in consumer protection.
We agree with the Government’s analysis that aspects of the CCA have not worked well for consumers in practice and are in need of modernisation. Some inflexible information requirements in the CCA like default notices with fixed wording tend to produce a negative emotional response among recipients and can cause people to disengage from seeking help or respond to payment requests by borrowing more.
In contrast, evidence shows people in financial difficulty who felt creditor communications gave them options to deal with their situation or reassured them help was at hand were more likely to seek help from debt advice earlier.
As such, StepChange supports moving form and content requirements into FCA rules. A curated approach is vital: evidence shows there are more and less effective approaches to communicating with and engaging consumers, particularly those experiencing financial difficulty.
To this end, we would like to see the FCA:
- develop the evidence base of what works to support informed consumer decision-making and engage customers, including those in financial difficulty, commissioning new research to address evidence gaps such as in consumer interaction with digital products and services;
- use this evidence to frame rules and form and content good practice – while flexibility and space for innovation are appropriate, the transfer of form and content to FCA rules should not lead to a ‘free for all’ approach; and
- iterate and refresh evidence and guidance periodically, building on learning from market innovation.
We would also like to see the FCA continue to strengthen its understanding of digital consumer journeys and product design: there is a real risk that industry understanding runs ahead of the understanding and evidence available to the regulator and consumers themselves.
We remain of the view that parts of the CCA information provisions—specifically the requirement to provide enforcement, default and termination notices (but not the form and content of those notices)—should remain in legislation because of the serious consequences of such notices.
While StepChange supports moving form and content requirements into FCA rules, we are concerned by the Government’s proposals to remove rather than modernise the sanctions on firms for failing to follow those requirements.
Sanctions provide a strong incentive for firms to meet information requirements that create the basic structure and integrity of credit agreements. Information requirements play an essential role in offsetting the asymmetric relationship between firms and consumers and enabling consumers to take responsibility for their decisions; consumers cannot afford the current variability of conduct in the consumer credit market to creep into these basic aspects of credit agreements.
Consumer credit requires a specific regulatory approach because it is a challenging market to regulate: there are a high number of firms, which makes intensive monitoring and supervision of every firm impossible, strong incentives for firms to act in ways that are profitable even if doing so causes serious consumer harm, and a high level of consumer vulnerability among customers.
We do not agree with the Government’s argument that FCA supervision can provide the same dissuasive effect as self-policing sanctions in the CCA: the number of firms, the persistent evidence of misconduct among some firms in the market and the finite resources of the FCA mean that FCA rules alone will not provide an appropriate level of protection for consumers. While the Consumer Duty can help raise standards if implemented effectively but is not a replacement for other consumer protections such as those in the CCA.
There is a better way forward by modernising sanctions in the CCA or providing the FCA with an equivalent power that reflects a proportionate and balanced approach to mitigating against risks to consumers.